Should You Pay Cash or Finance that Boat Purchase?

For anyone considering buying a boat over 30 feet in length, one of the biggest questions asked is often, “Should I pay cash or finance a boat purchase?”

The answer has been debated for about as long as boat financing has been available. It used to be that boat buyers preferred to pay cash for a boat purchase because they felt “guilty” financing such a large discretionary purchase. However, over the years, marine loans have become more popular, especially since today most people finance car and home purchases and are comfortable taking out loans for large purchases.

While there are no publicly available official statistics on how many boat buyers finance versus pay cash, information gleamed from a variety of sources suggests the following:

• For boats around 30 to 50 feet, financing is fairly common, especially for production cruisers and sportboats.
• For larger, pricier boats, buyers typically prefer cash to traditional financing.
• However, with large luxury yacht purchases, some buyers use structured financing for tax or liquidity reasons.

While a cash purchase might make sense for those with adequate financial resources, other buyers prefer financing because it allows them to amortize the purchase over time while enjoying the boat now. And it spares cash for investing or other purchases.

Generally, financing a boat purchase might be preferable when:

• Fixed interest rates are lower.
• The cash saved and invested elsewhere will outperform the loan rate over time.
• A borrower wants to use the cash saved for other projects.
• Paying cash for a boat would negatively impact the borrower’s liquidity.
• The borrower has stable income and substantial assets.

This is why many affluent buyers prefer to finance. Marine loans typically run for up to 20 years and require as little as 10 percent down. So, an investment returning 9 to 10 percent over time might leave a person feeling wealthier than putting that money into a boat.

On the other hand, cash is preferable when:

• Interest rates are high.
• The buyer wants to avoid debt, especially on a depreciating asset.
• The boat is older. In fact, older boats are more difficult to finance – especially if they’re more than 20 years old.
• The buyer plans to sell within a few years.
• The buyer’s investment strategy is more conservative and unlikely to outperform the cost of financing.
• The payment would constrain retirement savings or lifestyle.

Even when buyers are paying cash, they often take funds from other sources, such as checking or savings accounts, home equity lines of credit, the sale of securities or other assets, or they pull the funds from a family business or trust. And while using these sources might save on interest expense, often there are hidden costs that can offset the savings.

For buyers who choose to finance a boat purchase, it’s important to deal with a lender that specializes in recreational marine lending. Experienced marine lenders typically will look at the following:

• The borrower’s credit score – 720-plus is favorable.
• The amount of the down payment, where 20 percent often is preferred.
• The size of the loan, where larger loans are preferable to lenders.
• Whether the boat is new or used and the boat’s type and age.
• A debt-to-income ratio of under 40 percent.

So, should you finance that boat purchase rather than pay cash?

It really boils down to each buyer’s personal financial situation and what he/she is comfortable with doing.

For more information on marine financing, visit the National Marine Lenders Association at marinelenders.org.