As we bring 2023 to a close, the United States Federal Reserve (aka The Fed) has maintained interest rates for the 3rd straight time this year and signaled the potential for rate reductions in 2024. If I had a dime for each time since then someone asked me if it means it's a good time to finance a boat, I'd be a wealthy man. And to tell you the truth - it's complicated! It could result lower interest rates, however that's not guaranteed as there isn't a direct link between marine lending and The Fed's interest rate decisions. Boat loans are aligned with long-term borrowing, but The Fed's decision applies to shorter-term borrowing; and while The Fed decision will impact long-term borrowing indirectly, the most significant factors impacting your ability to secure a boat loan will be credit market trading and the cost of money, your specific needs and credit score, along with credit history and your overall financial profile, amongst several other factors.
Lucky for you this article isn't going to bore you to tears on how The Fed's interest rate decisions indirectly impact boat loans; just know that when you do quality for a boat loan, the interest rate and terms are mostly based on factors outside what you see on the news! Today we'll dive more into the types of loans, how they work, and who to contact to get the process started so that you can come to the table with a pre-approved amount to spend on your dream boat.
Secured vs. Unsecured Boat Loans
Traditionally you'll find 2 types of boat loan options. Secured boat loans are probably the easiest to understand for most folks, as they work similarly to a home loan. In a secured loan you'd borrow money with a set interest rate plus collateral in case you default on the loan. And you guessed it, typically that collateral is the boat itself, meaning if you default on the loan you'll wake up one day and your boat could be gone, safely sailed into the capable hands of your lender. Secured loans are typical for borrowing above $100,000, come with lower interest rates and terms up to 20 years, and are the most common loans we see.
The second option, known as an unsecured loan, is when you'd borrow money without any collateral, which means the bank will take on much higher risk. This type of loan is secured via individual factors such as credit score, credit history, income, and your overall individual abilities to make timely and consistent payments. Should you default the bank will not have the ability to directly seize the boat since it wasn't put up as collateral, and can generally only resort to state and federally regulated legal avenues to reclaim the debt itself. In this scenario, while the interest rate will certainly be higher, your boat will be much more secure should you fall on hard times. We've seen unsecured loan terms up to 7 years, and typically are under $100,000.
Do I Need Pre-approval to Buy a Boat?
This will vary dependent upon your specific scenario, but generally speaking if you are not paying 100% cash you'll want to speak with a boat loan professional to obtain a pre-approval BEFORE you start searching for your dream boat. This will not only save you, your broker, and everyone involved a "boatload" of time and effort, but knowing what you can actually afford before you start the search will be immensely helpful. Imagine falling in love with a $700,000 catamaran only to learn after you've viewed 10 boats and have an accepted offer that the bank will only lend you enough to afford a $400,000 catamaran. Not good, right?
Boat Loan Calculators
DO NOT base your buying decisions on what an online boat loan calculator tells you. Those calculators are a wind indicator only, and will never replace the expertise and knowledge of an experienced marine lending professional. While there is no shortage of marine lenders out there, we personally love referring clients to Zack and Greta at Azul Marine Lending, based out of Sarasota, Florida (and no, we DO NOT get a referral fee or kick-back for sending people there). Zack and Greta are lending brokers with access to a number of different lending institutions. One of the many things we love about Zack and Greta is they take a holistic approach to lending, not only to aid in identifying loan options, but also offer guidance to support how a boat, the associated loan, and long term boat ownership costs, could impact your total financial picture. Click here or on the apply button below to request a free online application from Zack and Greta.
What Does my FICO Credit Score Need to Be?
While a FICO score of at least 650/700 is generally considered favorable, it's important to understand that banks look at much more than a credit score when making lending decisions. Personal credit history, liquidity, income stability, and debit-to-income ratio are only a few of the many factors that will drive a lending decision. With that being said, a credit score below 650/700 doesn't necessarily mean you won't be able to secure a boat loan, especially if all the other factors at play are favorable.
The Big Picture
Navigating the waters of boat loans involve understanding a broad array of economic and personal financial factors. While The Fed’s interest rate decisions do indirectly play a role, boat loans are influenced most by the rise and fall of supply and demand, a lender's costs, your financial profile, the boat you're looking to purchase, and the type of loan you choose, to name a few. Comprehensive guidance tailored to your financial situation is a critical first step in the boat buying process, so be sure to reach out to an experienced marine lending professional as a first step. Their expertise can ensure that your dream boat aligns seamlessly with your overall financial health, and ensures the buying process goes smoothly.