Getting a loan for a boat: 3 options for smooth sailing

Happy couple sitting on a boat that they bought with a loanImage: Happy couple sitting on a boat that they bought with a loan

In a Nutshell

If you’re looking to finance a boat, you have a few options. Here’s a look at three and how to determine if one is right for you.
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Buying a boat — what could be more exciting?

But if you don’t have the cash on hand to buy your boat outright, your dreams of smooth sailing could run aground — unless you can secure financing.

Boat dealers and manufacturers often provide financing, but you should research and consider all of your borrowing options before setting sail. The more you know about your options, the easier it may be to pick a loan with the best terms.

Read on to learn about a few options to get a loan for a boat, and the benefits and drawbacks of each.

Consider a few available loan types

Boat loan

These loans are primarily issued by boat dealers and manufacturers as well as lenders offering specialized loans for boat purchases. A boat loan is typically secured by the boat but may be secured by other collateral on occasion. Some lenders even offer unsecured boat loans to borrowers with good or excellent credit.

Pros of a boat loan

  • A secured boat loan may tend to offer lower interest rates than an unsecured loan
  • Depending on the lender, loan type and value of the boat, you could get a loan term of up to 20 years

Cons of a boat loan

  • Many lenders require a down payment in the range of 10% to upwards of 20% of the loan amount
  • Interest rates may vary based on the state of the boat (new vs. used)
  • If you default on a secured boat loan, you could lose your boat

Home equity loan

Another option is to use a home equity loan to finance your boat purchase. Instead of using the boat as collateral, home equity loans use your home as collateral. Though this option only works if you qualify for a big enough home equity loan to finance a boat.

Pros of a home equity loan 

  • Since these loans are secured, they can offer lower interest rates than some other options
  • You may qualify even if you have bad credit
  • You may be able to borrow up to 85% of the amount of the equity you have in your home

Cons of a home equity loan 

  • Lenders can charge expensive closing costs and other fees
  • If you default on the loan, you could lose your home
  • Since you’d be using the funds for a boat, rather than to buy, build or substantially improve the home you use as collateral, the interest paid is not tax-deductible

Unsecured personal loan

You can typically use a personal loan for just about anything, including buying a boat. Various lenders offer unsecured personal loans, which can make it easier to shop around and compare interest rates and other terms.

Pros of an unsecured personal loan

  • Since the boat isn’t used as collateral on the loan, the lender can’t repossess your boat (though as with any loan, defaulting could damage your credit)
  • If you have excellent credit, you may be able to qualify for a low interest rate
  • Some lenders offer up to $100,000 for qualifying borrowers

Cons of an unsecured personal loan 

  • You might still qualify if you have bad credit, but your interest rate could be high
  • Repayment terms often max out at seven years, which may make it more difficult to repay a larger loan
  • Some lenders charge high loan origination fees

Steps to take when shopping for a boat loan

Regardless of how you choose to finance your new or used boat, it’s important to try to get a loan with the best terms for you. Here are three steps that can help.

1. Check your credit

Depending on your credit situation, you may be limited in your loan options. Check your credit scores to see where you stand. Be aware that different lenders may have their own standards, but 700 and higher (on a scale of 300 to 850) is generally considered good.

If your credit scores are low, consider getting a copy of one of your credit reports to learn more about what may be affecting your scores. Also, check for potential errors that you can dispute.

2. Pay down other debt

In addition to checking your credit and a number of other factors, lenders may also look at your debt-to-income ratio to help determine whether to approve your application.

This number is calculated by dividing your total monthly financial obligations by your monthly gross income. By paying off existing debt, you can decrease your DTI and may be able to improve your chances of getting a loan. Plus paying off other debt could free up funds that you can put toward a down payment on your boat or toward your boat loan’s monthly payments.

3. Get prequalifed before you start boat shopping

The process of buying a boat may go more smoothly if you already have an idea of how you’re financing the purchase. As is the case with other loan types, you may be able to apply for prequalification for a boat loan or personal loan. And since prequalification typically only requires a soft credit check, it shouldn’t hurt your credit scores.

Getting prequalified with several lenders may make it easier to pick the one with the best terms. It can also help you determine if the financing terms the boat dealer offers are competitive.

Bottom line

Financing a boat can be a painstaking process. But such a large financial commitment deserves some extra time and research to make sure you’re not paying more than you have to in interest and fees. It’s also important to make sure that you can afford the monthly payments.

As you review each of the financing options available to you and follow the steps we’ve outlined above, you may have a better chance of getting your dream boat without breaking the bank.

About the author: Ben Luthi is a personal finance freelance writer and credit cards expert. He holds a bachelor’s degree in business management and finance from Brigham Young University. In addition to Credit Karma, you can find his wo… Read more.