You decided to buy a boat, and then realized that boats exist for free, all the way up to a billion dollar cruise ship. Show how much boat can you afford?

If you are getting a loan, you do not want to exceed 43% debt to income from all your loan payments. Your max payment would be your pre-tax income multiplied by 43% and then subtract the payments for your mortgage, car payments, and any other loans you make payments on.

The thing about boats is that they are a luxury purchase. Unless you are looking to buy a boat that you will charter and use as a business. This article does not cover buying boats for business and is strictly focused on pleasure boating.

To Loan or Buy Cash

If you have saved up cash for the purchase of a boat, the question of how much boat you can afford comes down to maintainance, what else you could use the money on, and what you feel is reasonable. This is much more subjective.

If you are going to use loan to buy the boat, keeping the monthly payment of a boat in line with your other expenses is important. Depending on how you prioritize your housing, car, and boat payments, you can afford different amounts for your boat. A good rule of thumb is that your boat payment should be less than 5-10% of your monthly income.

Most people have very serious opinions on whether you should get a loan on a luxury item like a boat or not. The way I see it a car loan or home mortgage are basically luxury goods after you surpass the basic necessities. Most people do not have a problem with getting a large mortgage on a nice house in a nice neighborhood.

Is it a loan on a boat good debt? Nope. Is it the best way to spend money? Probably not. Is it a mortal financial sin? Nah.

Debt to Income Ratio

Lenders for a boat loan are going to look at your total debt to income ratio. This is all your debt payments, home mortgage, auto loan, and student loans. compared to  your pre-tax income.

43% debt to income is the highest ratio that most lenders will lend up to for a mortgage. This is important because you do not want your boat loan to get in the way of refinancing, moving, or buying a new house.

New or Used Boats

Some banks offer a slightly lower interest rate for new boats.

One thing to note on a used boat is you will likely want to put some money into upgrading or replacing worn aspects of the boat. An example of this would be updating the upholstry that has worn over time.

How Much Does it Cost to Maintain a Boat?

Boat ownership costs more than simply the purchase price of the boat. There are a number of ongoing expenses relating to a boat. A good rule of thumb is that they will be between 10 and 25% of the purchase price of the boat.

Annual expenses for a boat include:

  • Taxes
  • Insurance
  • Registration
  • Mooring/Docking
  • Winter Storage
  • Gas
  • Maintainance

How much Down Payment will be Required?

Most boat loans require a down payment. For instance, SunTrust offers boat loans with 15% down payment. Some loans are with 10% down payment on boats 2001 and newer.

Usually boats under a certain dollar amount will have higher down payment requirements.

Can I get a Boat Loan with Bad Credit?

Technically, there are lenders who will offer boat loans to individuals with bad credit ratings. Since a boat is a luxury purchase, you shold think through whether it is a good idea to be getting a loan on a boat with a low credit rating.

It is possible that you have repaired whatever underlying condition in your finances that caused you to have a bad credit rating, and it just takes time for your rating to improve.

The interest rate will be higher, and in many cases could be as much as 2-3 times higher than the interest rate offered to a highly qualified borrower. You will likely not be eligible for the 10-20 year boat loans that are offered to borrowers with better credit scores.

How Do I get the Best Deal on a Loan?

It is a good idea to shop around a bit for the best interest rates and loan terms. Sometimes local credit unions will have the best deal for you. Other times a dealership can get the best loan, because they act as brokers for multiple lenders. Sometimes a bank offers the best rates. The key is to make a few calls and see what is available.

In order to get a low interest rate, lenders will look at your:

  • Credit history
  • Collateral
  • Length of loan
  • Loan-to-Value of loan

Some lenders will offer a discount if you set up automatic payments.

How Long are Boat Loans?

On a new boat, or boat over $50,000 you can get a 10-15 year loan. In some cases, you can even get a loan that is 20 years.

This might seem shocking to you if you have ever gotten an auto loan. However, compared to cars, most types of boats depreciate much slower.

The question becomes, what is the ideal length of loan for you? When planning for the future, even if I am putting aside more money for a loan, I like to get as long of a loan as makes sense before rates balloon upwards.

If there is no prepayment penalty, I then can put additional money towards the monthly payment. This makes it so if there is an unforseen circumstance, I can go back down to the original loan payment amount without a penalty. In a 10-20 year loan, the chances of a career change, company downsizing or other event is decent. So having this flexibility is important to me.

How Much do Boats Depreciate?

Similar to cars, when you drive a boat off the lot there is a decent amount of depreciation. Also, as the warranty starts to run out, there will be a hit to the value of the boat to a second owner as well. This is because a buyer is willing to pay a higher premium for a used boat if the manufacturer is still on the hook for any defects.

Beyond the more rapid initial depreciation, boats depreciate much slower than RV's or cars. Many well built boats have 20-30 years of depreciation ahead of them. Of course, the maintainance to keep them up is significant, but a well maintained boat does have the potential to hold its value for a long time.

Wrapping it Up

Deciding how much boat to buy is a personal decision. There are good rule of thumb guidelines. For instance, you do not want to exceed 43% of your income on debt service.

Beyond a boat loan, there are other expences to boat ownership such as insurance, storage, and maintainance.

Ultimately, buying a boat is about spending quality time with friends and family.