Boat Loans Explained
Many people take debt out from a bank to finance a boat purchase. Nautilys provides a calculator that lets you estimate what the loan schedule will look like and in the case of a floating rate loan, how it might change. Nautilys provides a boat loan calculator under the Downloads section or accessed here.
The key points for a boat loan include:
Where the Loan Comes From
There are many banks that provide boat loans, including some which specialize in maritime loans. There are also online lenders who typically are providing unsecured loans at higher rates. If you have a good credit score you most likely will get a decent rate from a bank.
Loan Amount
For new boats you can typically finance up to 80% of the cost, potentially 85% if you are a very strong credit, buying a standard boat. If you are in the market for a used boat, as a boat ages, the amount that a lender will provide (% of value) usually goes down.
Loan Tenor
The tenor is the amount of time you have to pay back the principal of the loan. For new boats this can be as long as 20 years. Older boats will normally have shorter tenors. A simple rule of thumb that lenders use is basing the tenor off the useful life of the boat. If they assume boats have 25 year useful lives, then a new boat can have a 20 year tenor. If the boat is 15 years old they most likely will keep the tenor to 5 to 7 years, but something that is underneath the remaining useful life (in that example the remaining useful life is 10 years).
Interest Rate
The interest rate is an important component as it is effectively the “price” you are paying overtime. Generally, interest rates can take one of two forms:
Fixed Rate: means you pay the same rate for the term of the loan. Many people like this as it gives them comfort on how much their payment will be, regardless of what is happening with the economy.
Floating Rate: means you pay a rate that can vary over time, which is usually reflected in a changing payment. The floating rate is comprised of two key elements: an index that is the basis for the rate and a margin, which is an amount over the index that the bank is earning.
Currently the Secured Overnight Financing Rate (“SOFR”) is the most common index used for floating rates. SOFR changes daily and would typically cause the monthly rate of a floating rate loan to change each month. One way to get a sense of how the floating rate may change in the future is to look at the forward curve, which we will not decompose here, but is essentially a future expectation of interest rates (a good source is this link).
The major risk you have with floating rate loans is that interest rates increase, which means your monthly payment goes up. Depending on loan size this can be hundreds of dollars per month. If you take a floating rate loan out you need to have some “buffer” in affording the monthly payment.
Upfront Fees
There’s always fees somewhere in a financing transaction. Expect at least 1% of the vessel value in fees. These will be things labeled such as origination fee, credit assessment fee, etc.
Prepayment
While not usually the case, there can be prepayment penalties for paying off a boat loan. When evaluating different boat loan offers, make sure to check if there is a prepayment penalty. This can come into play if you trade the boat in later for a new one. Technically you are prepaying the loan when you do the trade in. If you use the same lender, they may waive fees like that, but if you go to a different provider the bank holding your original loan will likely charge any prepayment fees that were agreed.