Boating is a passion for many people, and owning a boat is a dream come true. However, boats can be expensive, and not everyone can afford to pay for them outright. In such cases, boat loans can be a great way to finance a purchase. But when it comes to boat loans, there are two types to consider: secured and unsecured. Secured loans require collateral, such as the boat itself or a home or car, while unsecured loans do not require collateral. Both types of loans have their advantages and disadvantages, and it’s important to understand the differences between them before deciding which one is right for you. In this blog post, we’ll explore the differences between secured and unsecured boat loans, their pros and cons, and how to choose the right one for your needs.
A secured boat loan is a type of loan that is backed by collateral in the form of a boat or other watercraft. When you take out a secured boat loan, the lender uses the boat as security for the loan. This means that if you default on the loan, the lender can repossess the boat to recoup their losses. Because the lender has this added security, secured boat loans often come with lower interest rates than unsecured loans. However, it’s important to note that if you default on the loan and the lender repossesses the boat, you could lose ownership of the boat.
If you need money for other expenses but have equity in a boat you own, using it as collateral for a loan may be an option. Like cars or homes, boats can potentially serve as security for financing to tap your vessel’s value while keeping it.
In this comprehensive guide, we’ll explain how boat loans work, the types of loans available using marine craft as collateral, factors lenders consider, and steps to getting approved. Read on to learn how borrowing against your boat’s equity can provide access to funds while still letting you hit the open water.
How Do Boat Loans and Collateral Work?
With a boat loan, the vessel itself typically serves as collateral securing the financing. This means the lender can seize or sell your boat if you default on the loan.
Lenders prefer collateral because it reduces their risk – if you stop making payments they can recover losses by repossessing and selling the boat. This collateral requirement helps qualify borrowers who might otherwise be deemed too risky.
You’ll only be approved for a boat loan amount in line with your vessel’s current value. The lender won’t let you borrow more than your boat is worth, ensuring they can recoup the loan balance by selling the boat if necessary.
What Types of Boat Loans Allow You to Use It as Collateral?
Two main types of loans allow you to leverage your boat’s equity as collateral:
Boat Purchase Loans
Like auto loans, these extended financing to directly buy and pay off a boat. The boat itself serves as security for the loan.
Boat Refinance Loans
If you already own your boat outright, refinancing is an option to tap equity, just like refinancing a home. The boat serves as collateral for the new loan, replacing any previous lien.
In both cases, the lender places a lien on the boat title. If you default, they can seize the boat and sell it to repay the loan balance.
What Factors Do Lenders Consider When Using a Boat as Collateral?
Lenders mainly consider these key factors when underwriting boat loans with your vessel as collateral:
Loan-to-Value (LTV) Ratio – The loan amount compared to the boat’s value. A lower LTV signals less risk.
Boat Value – Determined by the sales price if purchasing or professional marine survey if refinancing. Higher values support larger loans.
Boat Condition – Older boats in poor condition are riskier collateral than newer, well-maintained boats.
Boat Type – Fiberglass boats typically hold value better than wood boats or less prestigious brands.
Borrower Creditworthiness – Good credit, income, and other debt levels demonstrate ability to repay the loan.
Evaluating these factors minimizes the lender’s risk when approving a loan against your boat’s equity.
What is the Boat Loan Application Process?
To get approved for financing with your boat as collateral, follow these key steps:
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Find current boat value – For refinancing, get a professional marine survey inspection report. For purchases, the sales price often determines value.
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Select loan amount – Choose loan amount based on affordability and your boat’s value. LTV ratios up to 80% are common.
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Get pre-approved – Before boat shopping, get pre-approved by submitting financial docs to demonstrate creditworthiness.
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Make offer – With pre-approval letter, you can negotiate price and make an offer if purchasing.
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File loan application – Formally apply for financing by completing the lender’s application forms and documentation.
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Lender underwriting – The lender reviews your application and collateral boat condition to make approval decision.
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Close on loan – Sign final loan documents and receive loan funds, with the boat title transferring to show the lien.
Start the pre-approval process early before negotiating a boat purchase. This puts you in a strong position to secure financing quickly.
Alternatives If You Can’t Use Your Boat as Loan Collateral
If you don’t own a boat yet or your vessel won’t qualify as collateral, several alternatives to tap funds exist:
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Unsecured personal loan – Borrow based on creditworthiness alone without collateral. Often have higher rates.
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Home equity loan – Leverage available equity in your primary residence as collateral if applicable.
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Auto equity loan – Use a car you own outright as collateral if it has sufficient value.
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Secured credit card – Requires a cash deposit as security for the credit limit to establish credit.
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P2P loan – Borrow from individual investors via peer-to-peer lending marketplaces online.
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401(k) loan – Allows borrowing against retirement savings, but limits apply and IRS penalties if not repaid.
While less preferable than collateral like a boat, other options exist if you need money and can’t or don’t want to use your vessel as security.
The Bottom Line
Using your boat as collateral for a loan can be an effective way to tap into your vessel’s equity for other financial needs while maintaining ownership. Both purchasing a new boat and refinancing an existing paid-off boat allow borrowers to leverage value as security for favorable loan terms from lenders.
Just be sure to only borrow what your boat is worth, have it professionally appraised first, and work with specialized marine lenders. Taking out a smart loan against your valuable boat asset can provide financial flexibility and liquidity when needed.
Disadvantages of Unsecured Loans
While unsecured loans can offer several advantages, there are also some disadvantages to consider when taking out an unsecured boat loan. Here are a few:
- Higher interest rates: Unsecured loans typically come with higher interest rates than secured loans, as the lender is taking on more risk by not requiring collateral. This can result in higher monthly payments and more total interest paid over the life of the loan.
- Stricter qualification requirements: Because unsecured loans are riskier for lenders, they may have stricter qualification requirements than secured loans, such as a higher credit score or income level.
- Smaller loan amounts: Unsecured loans may not offer as much financing as secured loans, which can limit the amount borrowers can borrow.
- Shorter repayment terms: Unsecured loans often come with shorter repayment terms than secured loans, which can result in higher monthly payments.
- Potentially damaging to credit score: If a borrower is unable to make payments on an unsecured loan, it can negatively impact their credit score and make it harder to qualify for loans and credit in the future.
Overall, borrowers should carefully consider the advantages and disadvantages of an unsecured boat loan before deciding whether it’s the right option for their financial situation. If the borrower has good credit, a steady income, and only needs a smaller loan amount, an unsecured loan may be a good option. However, borrowers who need a larger loan amount or longer repayment terms may want to consider a secured loan.
Advantages of Unsecured Loans
While unsecured loans may not offer the same security as secured loans, they do have some advantages. Here are a few advantages of an unsecured boat loan:
- No collateral required: The biggest advantage of an unsecured boat loan is that it does not require any collateral, which means borrowers do not have to put up their boat or any other asset as security.
- Faster application process: Unsecured loans typically require less paperwork and a shorter application process than secured loans, which can make it easier and faster to obtain the loan.
- No risk of losing collateral: Since there is no collateral required for an unsecured loan, borrowers do not have to worry about losing their boat or other assets if they are unable to make their loan payments.
- Flexibility: Unsecured loans can be used for a variety of purposes, including financing the purchase of a new or used boat, making repairs or upgrades to an existing boat, or covering other expenses related to boating.
- No appraisal required: Because there is no collateral involved, there is no need for an appraisal of the collateral, which can save borrowers time and money.
Overall, unsecured boat loans can be a good option for borrowers who do not have valuable assets to use as collateral or who do not want to risk losing their assets if they are unable to make loan payments. However, borrowers should be prepared to pay higher interest rates and may face more stringent credit requirements than with secured loans.
Boat Loans 101: Should You Finance A Boat?
FAQ
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