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November 10, 2010

Scoring Credit for a Boat

Money is readily available, but new rules impact the way lenders grant boat loans.

You've been scrimping and saving for months, and the local dealer has inventory to move, so you're finally ready to pull the trigger on the boat of your dreams. Only financing stands between you and salt spray. Will that be an obstacle? It doesn't have to be, although the recession and the recent banking overhaul have changed the way lenders grant boat loans.

"We have more lenders than ever, and they're looking for qualified buyers to loan money to," says Phillip Hawkins, a loan specialist with Sterling Associates, a national marine financial brokerage firm. "Are the days of no income verification over? Definitely. But if you have the last two years of your tax returns and meet the underwriting guidelines - I'm not having any problems getting loans for qualified people. Each bank has different requirements, but generally the minimum credit-score rating is 680."

Sterling Associates and other brokerage firms secure loans on boats ranging from 20-foot center consoles to megayachts by shopping around with various lenders. Loan types range from the straight fixed-interest variety for set time periods to adjustable-rate or interest-only programs, depending on the amount of money being financed and the customer's needs. Hawkins says the typical guidelines are a 15 percent down payment with a term up to 15 years for loan amounts of $100,000 or less. For loans over $100,000, a 20 percent down payment is required, and the term can be extended to as much as 20 years. Interest rates are determined by the dollar level, with breaks at $25,000 to $50,000, $50,000 to $100,000, and above $100,000. Current interest rates typically range from 5.5 percent to 6.5 percent.

"I'd recommend prospective buyers get preapproved for a loan and find a lender they're comfortable with, one with experience and knowledge," Hawkins says. "At Sterling, the majority of us boat and fish personally, so we know the marine market. Once a customer is preapproved, we can look at the many options available to get the purchase financed and get the new owner out on the water."

Though they may collect U.S. Coast Guard documentation, possible state document fees or prepayment penalty fees, brokerage firms do not charge for their services. Instead they are paid a percentage by the actual lender. Under the banking overhaul bill that was passed in July, these fees must be disclosed to the borrower. Large loan applications are typically handled by brokers, while boat dealers or hometown banks often process loans for smaller boats.

"The banking overhaul bill will definitely impact consumers," says Don Parkhurst, the senior vice president of the SunTrust Marine and RV Finance Division and a former president of industry trade group the National Marine Bankers Association. "It represents the most sweeping changes to the financial system since the 1930s. Finance brokers now have to disclose the fees banks pay to them. However, marine dealers are exempt from this disclosure requirement even though they are also paid fees by the bank. On a $1 million loan, that fee could be $15,000. Some borrowers believe they're eliminating the middleman by dealing directly with the lender, but in reality, brokers often get as good or better rates as the banks since they earn a volume discount."

The banking overhaul legislation will affect marine lending practices in other ways too. "This law has created a lot of uncertainty and confusion," Parkhurst explains. "For instance, primary lenders like banks will now be required to have more capital on hand and will be charged higher FDIC fees. National banks like SunTrust are further impacted. For 150 years, federal banking laws pre-empted state laws. But as a result of this law, banks may be subject to certain state laws like prepayment penalty guidelines or credit search requirements. Rather than one set of rules, we might have to play by 50, and that is going to force banks to quit doing business in some states. Less competition means costs, fees and rates go up, resulting in fewer choices for the loan applicant. This represents a definite change from what the market is used to."

Although the caveat "buyer beware" applies more than ever, there are still great deals out there on new and pre-owned boats. Liquidations or inventory clearances, historically low interest rates and manufacturers trying to ramp up production all mean great prices and lower monthly payments. "If you're in the market, you can't get a better deal than right now," Parkhurst says. "If you have a real cash down payment, there's definitely financing money available for the balance. Take the time to get preapproved. That will give a realistic price range so you know what you can really afford. It also gives you more options and a better negotiating position with the dealer. If you don't qualify for one loan, the bank will typically counter offer to close the deal. They want to earn your business." 

What's It Worth?

The first step in buying, selling or trading a used boat is establishing its value. To determine the base price, lenders use several sources, such as the BUC book (buc.com), the NADA guide (nadaguides.com), YachtWorld.com and UsedBoats.com. In general, the loan value is 15 percent less than the high retail price of the basic boat without additional equipment. There are some lenders that will factor in options and accessories, however.

"Vessel values fluctuate," says Sterling Associate's Phil Hawkins. "It all depends on the pedigree. The number of quality pre-owned boats is getting smaller, so many makes are holding their value even in the slower economy."