Boat Finance Strategy - Input Requested

[Pionkey]

I have my eye on a few boats and am close to striking a deal on a 2016-2018 Limited S soon. I plan on financing the boat and putting about 10% down. Rates are low and I am currently making 10%+ on investments so I have no interest in paying cash.

I originally was considering a 5 year loan term at about 5%. However, the plan is to upgrade to a newer model approximately every 5 years. So I was considering the idea of a longer term loan (15-20 years) that is being offered at a lower interest rate. Being that I will be selling the boat in about 5 years time, are there any significant reasons why this would not make sense?

I understand that by doing this, I will always have a loan payment and will not outright own an asset. However, I am looking at this kind of like leasing a car. I get to upgrade to a newer model every few years, have more buying power due to lower rates, and lower monthly payments. However, unlike a leased vehicle, there are no restrictions on how many hours I can put on the engines or modifications/upgrades I can make.

Interested to hear your thoughts on this.

 

[2kwik4u]

If you're going to flip boats every 5 years, and you want to make it like a lease, then I would attempt to find a term/rate that allows you to keep the loan balance in line with actual value. A 15-20yr loan will have you upsidedown for the first 5-10years, and you'll have to bring cash to the table for each instance that you sell. If you could trim that down to say a 10yr loan with acceptable interest rate, you are liable to "break even" on the sale depending on market conditions. A 2008 year, you'll be behind a COVID year and you'll be ahead.

Another train of thought would be to take the longest term you can, then sock the intended 5yr transaction money away in one of your 10% earning investments. Then just know that you're saving up for that expense every 5 years or so.

Really depends on how you want to structure it, however, the more you pay up front, and the faster you pay it will lead to easier/less stressful transactions on the sales.

I tend to take the longest term I can on everything, then pay faster than needed. Took 96mo on my Audi, but am paying at the rate of about a 48mo note. The idea here is that if the fit hits the shan, I can drop back and punt and only pay the minimum. Did the same thing on my AR190. I took a 15yr note on it, and had a major disruption in my income yes than a year later pretty unexpectedly. Went from paying $1k/mo to $300/mo minimum until I got my feet back under me. The flexibility is worth it IMO. I tend to keep boats 10+yrs, and cars ~5-6yrs.

Also, I'm a fan of leases if they're structured right, however I don't know anyone that leases on personal marine equipment.

 

[NewBoater]

What’s best places for low interest rates these days for boats? Yamaha still got the best rates?

 

[Robconn]

In 2016 I purchased a new AR192. I opted for 15yr step loan. ( thought: cheap Easy way to ease into boating scene / new boat warranty as not mechanical.)
At year 3, if I was to trade in, I would need to come up with 12k in order to make up for principal on loan. The outstanding principle was close to the amount of original loan at three years. I did not make extra payments. In retrospect, if thats your plan to trade up, you’ll need a way to ensure your principal decreases enough by 5 yrs. at 5 yrs my buyout is 27k. With no extra payments on loan. I think originally it was 36k at the time of purchase.
of course pre covid trade in offer at year three.

 

[Cambo]

The thing I don’t understand is that if your making 10% on your investment returns why would a bank give a loan for 4%
or 5% and just not invest that money in the same type of investment. Maybe they bank on people taking a 15 to 20 year loan and use it for only 5 years paying most of the interest up front so they earn 12% or more.

 

[2kwik4u]

Maybe they bank on people taking a 15 to 20 year loan and use it for only 5 years paying most of the interest up front so they earn 12% or more.

This. As well as default fees. Also some risk mitigation in there I would think. 10% is not a "standard" rate of return. Stock market does 7% on average. If assume you only lend to well qualified borrowers than 4% "guaranteed" is a pretty good return.

Could also be some level of "loss leader" mentality as well. Get them in the door with a boat loan, then sell them on a checking/money market account later, or maybe a home loan later. Something like that. I doubt the bank makes all it's profits on loans, so they can "afford" to take a little less profit on them, and a little more elsewhere.

I have no knowledge of banking system directly, just conjecture on my part here.

 

[adrianp89]

This. As well as default fees. Also some risk mitigation in there I would think. 10% is not a "standard" rate of return. Stock market does 7% on average. If assume you only lend to well qualified borrowers than 4% "guaranteed" is a pretty good return.

Could also be some level of "loss leader" mentality as well. Get them in the door with a boat loan, then sell them on a checking/money market account later, or maybe a home loan later. Something like that. I doubt the bank makes all it's profits on loans, so they can "afford" to take a little less profit on them, and a little more elsewhere.

I have no knowledge of banking system directly, just conjecture on my part here.

This is pretty close to how they operate, in general. Most people have much higher than lowest rates too. I had a job offer for Wells Fargo and the training was basically up sell services when they come in for anything. (Of course later they got in big trouble for how they did this). When I worked at JP Morgan, a lot of money came through processing transactions. Fractions of a penny, but handled trillions every day - those fractions added up quick. They also had their hands in just about anything that involved money. On a smaller scale, know a guy that owns a buy here pay here. Sells a car for a profit, makes 10-15% on the loan. They don't pay, he gets car back and sells it again for original price and keeps all payments made as profit. That guy probably brings in 500k+ a year. The bank I work essentially does the same thing and is a leader in sub-prime loans....... So many different ways a bank can derive their income.

 

[HangOutdoors]

@2kwik4u You are pretty spot on. Banks and Credit Union's especially use boat / vehicle/ RV loans as gateways to get you into the door for higher interest rate products, like unsecured personal loans and especially credit cards which typically carry the highest interest rates. Not to mention checking accounts, etc.

With the stock market moving all over the place profits and increased rate of return can be had on both sides of movement. How much is dependent on the strategy and risk. You always here "I am making 10%" on my investments. Some can and some don't.

 

[HangOutdoors]

On a smaller scale, know a guy that owns a buy here pay here. Sells a car for a profit, makes 10-15% on the loan. They don't pay, he gets car back and sells it again for original price and keeps all payments made as profit.

A lot of those sales lots around here. They are set up to take advantage and make money. My daughter was going to buy her own car and went to one of the places. Wanted to do it on her own. Luckily, she called me in the morning though before she signed the paperwork. The payments were ridiculous as was the interest rate and contract clauses. I took her up to the dealership and leased her a small car.

 

[FSH 210 Sport]

I use the same strategy as @2kwik4u, commit to the lowest monthly payment then make additional payments to the principal.

The dealership I bought my boat from used US Bank, this is not a bank I would ever do business with again.

 

[2kwik4u]

A lot of those sales lots around here. They are set up to take advantage and make money. My daughter was going to buy her own car and went to one of the places. Wanted to do it on her own. Luckily, she called me in the morning though before she signed the paperwork. The payments were ridiculous as was the interest rate and contract clauses. I took her up to the dealership and leased her a small car.

WAy Way WaY back in the day. Like, 22 years ago. I had a buddy that showed up to work in a "new" car. It was literaly a beat to dammit POS Tempo. He washed it up and was super proud of it. While slinging boxes (worked in the sort center at UPS) we started chatting about financing and such. He told me he thought it was a decent deal. Only $145/wk........Wait, you pay by the week?...Yeap, and he was somewhat proud of it. He didn't realize it worked out to just over $628/mo. He just couldn't believe I was driving that brand new S10, and how much it must cost me. About choked when I told him it was only ~$300/mo (which was still to much back then, but I was dumb). We looked at his paperwork at lunch. BuyHere/PayHere lot was charging him 28.5% interest, and would repo the car if he missed a single payment and start the term all over. I think it was like a 36mo term as well (of course expressed as weeks).

Such a terrible way to buy a car. If you can "afford" $145/wk, like, man get a bike this week, save two weeks, get a nicer bike, save 4 weeks, down payment on a car, or hell you're close to buying a cheap POS Tempo for cash outright in short order.

Combine this with places like Rent-A-Center that will rent you furniture on a weekly basis, and OOF it's so easy to just WASTE and WASTE money if you don't realize what you're doing.

I know I'm working hard to educate my kids, as I've had to learn most of these lessons on my own. Lost/wasted money, wage garnishments, collections. My finances were a literal shit show when I was in my late teens/early 20's. For reference, before my wife got ahold of my checkbook and finances she had to cosign for our first boat loan of $8,200 because I had forked everything up so badly and credit was garbage.

 

[HangOutdoors]

The problem is, is that those type of places offer a niche for individuals that have had challenges with their credit and finances. What looks like a good path, is not. It just perpetuates the problem because once down that road it makes it harder to come out.

 

[Pionkey]

If you're going to flip boats every 5 years, and you want to make it like a lease, then I would attempt to find a term/rate that allows you to keep the loan balance in line with actual value. A 15-20yr loan will have you upsidedown for the first 5-10years, and you'll have to bring cash to the table for each instance that you sell. If you could trim that down to say a 10yr loan with acceptable interest rate, you are liable to "break even" on the sale depending on market conditions. A 2008 year, you'll be behind a COVID year and you'll be ahead.

Another train of thought would be to take the longest term you can, then sock the intended 5yr transaction money away in one of your 10% earning investments. Then just know that you're saving up for that expense every 5 years or so.

Really depends on how you want to structure it, however, the more you pay up front, and the faster you pay it will lead to easier/less stressful transactions on the sales.

I tend to take the longest term I can on everything, then pay faster than needed. Took 96mo on my Audi, but am paying at the rate of about a 48mo note. The idea here is that if the fit hits the shan, I can drop back and punt and only pay the minimum. Did the same thing on my AR190. I took a 15yr note on it, and had a major disruption in my income yes than a year later pretty unexpectedly. Went from paying $1k/mo to $300/mo minimum until I got my feet back under me. The flexibility is worth it IMO. I tend to keep boats 10+yrs, and cars ~5-6yrs.

Also, I'm a fan of leases if they're structured right, however I don't know anyone that leases on personal marine equipment.

That all makes sense. Thanks for the feedback. I'll definitely make sure I'm not upside down due to the loan term. Looks like from my calculations that would put me at about a 10 year loan. And of course ensure there are no prepayment penalties in the event I want to pay it down quicker.