F I N A N C I N G 1 0 1
b y j. p. l a m y
Do moths fly out of your wallet on those rare occasions you open it? Do you roll your change to get gas money? Do you find yourself wandering around boat shows with your tongue hanging out but fearful of approaching lenders for credit? Well Fear no more Boating Magazine’s Insider’s Guide to Buying a Powerboat by J. P. Lamy outlines strategies for budgeting, saving, shopping, and, yes, even financing a marine purchase. What follows are some times and techniques for getting a lender to put the money in your pocket.
Marine lenders are not as restrained as automobile lenders, and there are plenty of marine lenders out there. For older boats, most lenders use a standard appraisal guide to determine its current value, and they will generally lend up to 75 percent of market value. They’ll usually offer terms of at least two years on older boats, and four to six years is not uncommon. Remember, they are rating you as much as they’re rating the vessel.
On new boats, most lenders base estimated value on the invoice cost plus 35 percent. Depending on your credit history, they may lend up to 100 percent of the sale price if they are shown a significant difference between the purchase and the manufacturer’s suggested retail price. For example, if you were abel to bargain a sale down from $19,995 to $16,995, you’re showing a $3,000 equity, which may net you a good chance at 100 percent financing. But keep in mind that most lenders will give you their best loan rate only when you give them a minimum of 10 percent down in cash. It’s also worth noting that boat lenders will not excuse a poor credit history as easily as car lenders. Their reason? If you get into financial straits, the toys will be the first to go unpaid.
You can usually be preapproved by your regular bank for a particular amount of money, even if you haven’t yet chosen a boat. This is a powerful bargaining tool. To the owner or salesperson, preapproval works like a handful of cash. You’ll be able to cut right to the bottom line for anew boat, and a boat owner will be more likely to drop his price if he knows you are serious enough about buying to have already taken this step.
Dealers probably have several excellent sources at their disposal. Other financial lenders advertise regularly in marine magazines. When considering dealer financing, keep this in mind: The sell financing for profit, just as they sell boats for profit. There are many factors to consider when shopping for financing. Rate and term are the most important. This his how it works.
POINT OF INTEREST
The interest rate is based on the amount borrowed, and it goes down as the amount goes up. A lender may charge 10 percent for a $10,000 loan, yet lend the same person $15,000 at 9.75 percent. This is a graduated scale, with divisions at $10,000, $15,000, $25,000, $50,000, and $100,000. The graduation is usually a quarter point per division. The interest rate itself will fluctuate as any other, but the dollar value cutoffs are effectively fixed and the quarter-point graduation is typical.
Now comes the sales part. Any lender will attempt to get the best interest rate from you that he can. Let’s assume interest rates in the 9 to 10 percent range represent the “buy rates”—the rates at which a retail lender can obtain financing. Using the examples above, you will be quoted 11.75 percent on a $15,000 loan, which nets the lender 2 percent over his buy rate and substantial profits over the term of the loan. This increase may represent only a $17 increase in monthly payments, from $196 to $213, based on a 10-year term. Chances are the average consumer will accept this.
And this is what they count on. They will, no doubt, attempt to justify this in some way or another, but what it comes down to is sales technique. You’ll be told that the more you borrow, the higher the interest rate. Your credit is good, but not perfect. That late payment you made in 1972 really hurt you. The longer you borrow, the greater the risk, so they must charge you a higher interest rate. You are close to being maxed out on your credit limit, so the risk is greater and so is the interest rate. The psychology behind the sale is that you are now so psyched about the purchase that the interest rate is arbitrary. It isn’t.
You know your credit situation better than anyone. If you’re close to being maxed out, then a slight increase in interest may be in order, but not 2 percentage points. Lenders today are competitive and it pays to shop. What you need to keep in mind is that one financing offer is not the final word on the matter. A loan can be overpriced just as a boat can be overpriced. Tell them that you feel the interest rate is not satisfactory, and you will have to shop around. Name a reasonable interest rate and stick with it. Do not accept a longer term to lower your payments. Stick to your guns and get the best rate—or walk.
A STACKED DECK
Most lenders will also want to sell you insurance on your loan. It is called credit/life insurance. Should you become injured, the credit insurance will protect your credit by making your payments for you. Life insurance will pay off the loan should you die. If you want credit/life insurance, buy it. It is never required. If a lender insists on it when you don’t want it, shop elsewhere.
In addition, consumer loans should comprise simple interest with no pre-payment penalty. Most of them are, but some second-rate lenders will try to include a clause in with the loan that penalizes you for paying off the loan early, Don’t even consider accepting such an offer. If the lender won’t drop the prepayment penalty clause, drop that institution.
Avoid variable interest loans. You gain a slightly lower initial interest rate, but it’s something of a gamble because the lender can periodically adjust the interest rate, usually every two years. The rate gets tied to a T-bill index or some other indicator of the cost of money. Regardless of the index, the rate always seems to go up more than it goes down.
The next question is the term, or length, of the loan. Like the interest structure, term is based on the loan amount (this applies mainly to new boats). Older boats generally fall into the two- to six-year category and the division points are not well defined.
Remember that your loan depends mostly on you and your track record. If you have taken good care with your credit, you will be rewarded (albeit with a little negotiation) with lower interest rates and smaller monthly payments.
Use the Loan Payment Multiplier table to help you get the jump on those wizards of lending. It looks complicated but isn’t. first off, find your interest rate. Then multiply the amount you’re borrowing by the factor listed under the length of the loan; then divide by 1,000 for your monthly payment. In our previous example, the loan was $15,000 at 9.75 percent interest over 10 years. The monthly payment figures out to be $196.20.
This chart is set up primarily for new boats. Always feel out the lender on older boats. You will usually incur some other charges, such as taxes and fees. You may choose to pay cash for those so they don’t affect your payment amount. Not all lenders pay out to dealerships. The bottom line is always interest rate and term.
COVER YOUR ASSETS
The subject of financing leads directly to insurance. If you are financing the purchase of a boat and using the boat itself as collateral, the lender will almost always require that you carry insurance. That way, the balance of your loan will be covered if the boat is seriously damaged or lost.
A standard boat policy consists of hull coverage and liability coverage, which are roughly comparable to the comprehensive-collision and liability coverage that you purchase for a car. Of course, even if your boat is not financed, you should seriously consider insurance. In the area of liability, the analogy between boats and cars does not hold: You’re not required by law to carry liability insurance on a boat, although the possibility always exists that you’ll be held liable in an accident. Would you forgo liability insurance on your car if the law did not require it?
Hull coverage provides for the repair or replacement of the boat if it is damaged or destroyed. Most boat insurance policies will cover the loss of the boat in any circumstance except those explicitly excluded. Typical exclusions include loss due to illegal use, defects in manufacture, or a lack of proper maintenance.
Insurance policies are further divided into boat policies and yacht policies. Although the line between them isn’t sharply drawn, boat policies tend to cover smaller boats, such as open boats with outboards. Yacht policies cover more substantial and valuable boats. Nonetheless, many owners of smaller boats opt for a yacht policy.
A yacht policy will cover an absolute value for the boat agreed upon hen the policy is issued; if a boat insured for $30,000 is a complete loss, your check should be for $30,000. You may be forced to lower the stated value of the boat over time in response to periodic surveys required by the insurer (every five years is typical), but until then the coverage amount is stable. Many boat policies, on the other hand, will reimburse you only for the current, depreciated value of the boat at the time of loss. This may be significantly less than what you stated when the policy was drawn up. Not surprisingly, yacht policies tend to be more expensive.
Be sure to inquire about depreciation when considering a policy. With both boat and yacht policies, you may be reimbursed for individual equipment items, such as canvas or propellers, at their depreciated value. Some people insure their boats through a rider on their homeowner's policy. As a rule, you can cover boats only up to a certain size by this route, and the liability coverage conferred will not be as comprehensive as it is with a specialized policy.
The second component of a boat insurance policy is protection and indemnity coverage, which protects you from liability if you are involved in an accident and successfully sued. Unless it can be shown that you violated the terms of your policy, the insurance company will provide you with legal representation and cover any damages awarded against you up to a specified point. Of course, if damages exceed the limit in the policy, you are responsible for the difference.
As with car insurance, your demographic profile, background, and planned activities will affect the cost of coverage. A recent history of insurance claims will probably increase your premiums. If a high-speed powerboat is in question, a bad boating record—and sometimes even a bad driving record—can hurt you. Completion of a U.S. Power Squadron or Coast Guard Auxiliary course in seamanship or piloting will help lower your premiums. Likewise, carrying more than the minimum required safety equipment should work in your favor.
Rates may be lower for boats that cruise in regions that are statistically less hazardous. In colder climates seasonal limitations are common: You’ll pay less for the months the boat is out of the water, although if you put the boat in early, you’re violating the terms of the policy and won’t be covered.
Finally, unlike automotive policies, boat policies cover activity within a defined geographical area. If you own a larger cruiser and plan an extended trip that will take you out of your coverage area, inquire with your agent about an extension.
Reprinted from Boating Magazine’s Insider’s Guide to Buying a Powerboat by J. P. Lamy. Copyright© 2000 by International Marine. Reprinted with permission of the McGraw-Hill Companies.