How to finance a boat

They asked me to write a story about finance. Are you kidding? Why would I want to do that? Dad always said don’t borrow money to buy toys. He was right, up to a point. A lot of water can pass under the bridge until you save enough spare money to buy a boat. If you finance one, I reasoned, I could enjoy the fun as I save or, rather, repay the loan.

What’s finance like? I thought about this for a while. It’s not very sexy. Have you ever been fitted for a shoe? Think back to those primary school days. Every foot is different. Some people walk around in shoes that aren’t comfortable. But if you’re sized right you can enjoy a perfect fit. Finance is a bit like that. You shouldn’t notice it. Like a great shoe. No pain or Achilles heel.

Of course, I’m not alone in having financed a boat. Like a lot of young adults, I started with a bank loan for my first set of wheels, a beaten up Datsun ute, and then borrowed for a trailerboat. It was a Seafarer V-Sea 4.74m cuddy cabin. My gosh, those memories of the great fishing stand out. Had I waited to save the $8k I would have missed out.

A non-essential, a boat is something that’s good to enjoy as a hobby. You are borrowing for a leisure product in a category that includes caravans and bikes. That brings with it certain borrowing parameters. And, as the one borrowing the money, you need a steady source of income to repay the loan.

Because borrowing money to buy a boat is a lifestyle decision, one that allows you to enjoy it while you pay for it, you need to be ruthless and regimented. You might have to forsake blowing $500 a night at the clubs. But look at the upside on your weekends. Fishing glory and/or fun family times.

The average boat loan is $45-50k over five years. You might do 30 per cent of that when you go to sell the boat after several years, but the cost benefit, the lifestyle dividends, will have flowed. Others play golf or travel a lot. For you, the love is the boat. I know it was and still is for me.

Right now is not such a silly time to buy, either. Interest rates are low, it’s a very competitive lending environment, with plenty of money slushing around. Real estate values are also high. Not that you need your house as collateral. The boat is the security for the loan. But a driveway and a garage will come handy. The Man Shed.

STRICT GUIDELINES
- The National Consumer Credit Protection Act 2009
There are stringent guidelines under which finance brokers operate these days. They need to become accredited, as responsible lending is a key part of their charter, and they operate in accord with the National Consumer Credit Protection Act 2009.

Contrary to what you may think, finance brokers aren’t into ripping you off. There is no value for them in seeing you default on a loan. Sure, they want your business, but they want repeat business. By government regulation they are not able to arrange a loan for you if you can’t afford it.

You might be a tradie, someone working part time and living at home, a Government clerk, a family man with a house in need of a boat in the driveway, or a self-funded retiree. Diverse people finance diverse boats, but all of them want a comfortable fit. For finding that — doing the paper- and legwork — the broker earns commissions which are disclosed before accepting any offers.

In our increasingly time-poor and service oriented lives, more and more of us are needing and seeking the services of just such a finance finder or broker. Bob Cush is the Operations Manager at Advantage Broker Services and advises and manages brokers from all over the country in their dealings with clients and lenders.

Advantage Broker Services is also part of the FindThatFinance.com.au network and, Cush tells me, through that network and the past 30-odd years, he has financed and advised on finance for a lot of boats.

For this advice article, I was glad to lend my ear to Cush to obtain clarity and definitive answers in what can seem like a complex world of finance.

BROKER OR BANK?
-  A broker has more avenues to find your finance
Why should I choose a financial broker over a bank? Cush says he has access to a wide range on money-lending institutions beyond just the realms of a bank. For some folk with past credit problems, well, this might also work.

"Everything to do with lending is governed by capacity. But if you walk into NAB you only have one outlet to determine your result. If you walk into us you have several different avenues," Cush  says.

"The banks won’t lend to you if you haven’t a credit profile. The other thing is that banks can make decisions for you and perhaps decide a boat isn’t a smart investment.

"But everyone’s circumstances are different and getting finance comes down to rate for risk," Cush says.

"Two days ago a person called for pre-approval to buy $20k boat. People don’t make instant decisions on boats and if they are approved to buy they can go shopping with confidence."

Cush says private sales form the biggest market for financiers. When you find a boat for sale and settle on a price, you will have to pay cash or transfer the funds. This is when pre-approval for a loan makes sense, as not everyone has a lazy $20k, $50k or whatever just hanging around.

Tip: Loan pre-approval is a smart thing as you can go shopping with added bargaining power when you have the money at hand.

CAPACITY IS KING
- You need to work a minimum of 20hrs at typically $30hr to finance a boat
The bottom line is this — all any financier is after is your capacity to repay a debt. They will look at your income (you need to work a minimum of 20hrs at typically $30hr to finance a boat), your living costs and your current debt. They will look to see if you own a house, car, have cash in the bank, and super.

Tip: A deposit and trade-in helps as it cuts down risk for financier.

If you are self-employed you must show the same capacity to repay the debt. So you will need financials/tax returns, although there is a default position using a letter from an accountant.

You can be in a working visa situation, a 457 for example, and borrow money for a boat. The same capacity rules apply.

Interestingly, more and more people are buying boats under joint ownership.

Often two people — dad and a son, or two neighbours — want to go fishing and share the goods. That’s okay providing the financier can see you have joint usage of the boat, despite living at two different addresses.

Lenders will also conduct searches to make sure the boat is not encumbered in any way. If it’s a private seller, they might inspect it using Redbook or Marshall batteries to sight check the HIN, rego and engine number.

But stability regarding employment is what you bed to
borrowing for leisure products. With moored boats and big cruisers, most
buyers have their own finance sorted. Trailerboats in the $40-$70k bracket make up the biggest business for boat finance.

"It does us and our consultants proud and we derive satisfaction when we get finance for people," Cush says.

SECURITY IS THE BOAT
- The boat secures your loan, but not just any boat
Secured loans make up 95 per cent of Findthatfinance.com.au’s business. That is to say, the boat is the security. But not just any boat. The broker lends money to finance power and sail, trailerable and large boats, new and used, including classics. It also finances repowers.

However, it won’t finance timber and ferro cement boats, strange one-off unknown brands of boats, and many of its financial backers have restrictions on sail. That is to say, they won’t take those boats as security for these loans. But the lenders will can still offer a personal unsecured loan for such a boat at a (much) higher rate.

"We get a lot of people buying older boats, an old Bertram, and we have avenues that can work if they met the terms. The home owner is best for this," Cush says.

Tip: The age of your boat can affect the cost of your loan. Generally, lenders like a boat less than 5-7 years old.

TYPES OF LOANS
- A boat loan is a lot different to a home loan
The main difference is that a home loan is stable, generally for an appreciating asset, and the terms are w-a-y longer.

Tip: The typical boat loan is a five-year term, though some go out to seven years.

You can organise a loan with a residual payout, more like a lease, but Cush discourages this because you’re paying interest on the residual amount for the term of the loan.

Here are two simple examples of the terms of a typical boat loan:

1. $50K Over 5 Years:
Amount: $50k
Term: 60 months
Interest Rate: 5.80 per cent
Repayments: $228.01pw or $989.60 per month including fees at a minimum

2. $50K Over 7 Years:
Amount: $50k
Term: 84 months
Interest Rate: 5.80 per cent
Repayments: $170.68pw or $740.65 per month including fees at a minimum

The above weekly and monthly repayments include expected fees and charges.  These rates would only be available to borrowers who fullfilled all the lending criteria for the asset being purchased and capacity requirements.

Tip: Generally, should you want to pay-out a loan ahead of schedule, an early termination fee could cost you up to $10 per month for each unexpired month on the contract. This fee varies between lenders. If you bought a charter boat as a commercial loan the early termination fees could be much higher, for example.

INTEREST RATES
- Everyone is fixated with interest rates
At the end of the day, it’s a ‘rate for risk situation’ determined by your circumstances. The monthly repayments and the effect on your budget are what are important.

Looking at effective interest rates or comparison rates — determined when all the add-ons such as origination fee, application and monthly account keeping fees are taken into account — the effective rate is generally moderately higher than otherwise advertised interest rates.

You might pay high 5 per cent on a secured loan if you are a homeowner or a professional in stable employment, but up to 15-16 per cent for an unsecured personal loan in a worst-case scenario. Rates vary a lot depending on who you are, your history and your capacity.

Of course, you may question why not just draw down on your home loan. The danger there is that you’re taking on debt on a depreciating asset (your boat) over a long period, which could be 25 years for a mortgage. You will need to be disciplined.

At the end of the day, you want a comfortable fit so you don’t notice your repayments, you don't spend too much borrowing to repay the boat loan, and can enjoy your boat with a sense of joie de vivre or love of life.

For Wannabe Warren, Aaron Angler, Cheap Thrill Charlie, the Joneses and Captain Capital, financing a boat isn’t so hard. For families with a home, there is also a lot of entertainment to be done these days. Mum and dad who are working with two kids and they want to get out and do things.

Boating is a wholesome activity and if you have a driveway or garage you’ve got an ideal set-up for a boat. Trailerboats and jet skis make up the lion’s share of boat purchases and finance arrangements. Speaking from experience, it’s not such a drag.