One of the biggest challenges when buying a recreational vehicle is that it’s not like buying a house or car. Most people buy their home with a mortgage and pay it off within ten years, but this isn’t true for boats. Lenders don’t usually provide boat finance even if you have home equity; they don’t typically provide boat finance because they aren’t considered essential, even though they’re certainly fun.
On top of that, there are unique risks associated with purchasing a boat that some buyers unfamiliar with this type of purchase might overlook.
Both boats and houses are depreciating assets
Boats depreciate faster than houses, but not as fast. Boats depreciate faster than recreational goods like snowmobiles or golf clubs (and even quicker than essential household items like refrigerators).
A boat as collateral is risky
Your personal property may be used as collateral when borrowing money for a recreational good. This is a way for lenders to give out more loans than they otherwise would without risking much more of their own money. If the borrower defaults on their loan and cannot repay it, then the lender can repossess whatever goods were used as collateral (in this case, a boat).
If your bank repossesses your boat because you defaulted on your loan, they will sell it to recover some or all of their losses. Unfortunately for them, boats don’t always sell well at public auctions and can take longer than expected to find buyers at low prices.
House equity is a better option
A common reason to finance recreation equipment is that your income fluctuates. For example, you might be a seasonal worker or an entrepreneur with high and low income-periods. This can make it challenging to qualify for a loan from a traditional bank, especially if the bank only wants a steady income from you.
For instance, if you’re self-employed and want to buy a boat but don’t have enough money saved up (or any money), consider using your home equity as collateral for the loan instead. A lot of people think this is risky. However, if they default on loans, they will lose their house.
Another advantage is that home equity loans are usually tax-deductible, whereas car loans are not tax-deductible because they are considered personal expenses rather than business expenses. But if you are employing your boat in a business, you can deduct boat finance from your income.
A boat should be well-inspected
If you’re planning on buying a boat, it’s vital to ensure the ship is well-inspected. This can help ensure you don’t buy a boat with problems or defects that could cost thousands of dollars in repair.
If you are purchasing a used boat, or if it’s your first time buying one, then it’s also essential to have someone who knows what they’re doing inspect it before committing to the purchase. Many things may not be visible during an initial inspection and only become apparent after using the boat for some time.
It’s recommended that inspections be performed annually or semi-annually (depending on how often the boat is used). Inspections should also include checking all applicable safety equipment and ensuring all parts of the vessel function properly and safely.
The risks associated with boat finance
Many other factors could affect the success of your financing opportunity:
- The willingness of your crew members to continue working on your vessel? If people leave you during this process, you will have problems paying back your loan and maintaining maintenance requirements.
- How much will fuel costs go up? This can quickly add up if gas prices increase significantly while you own your boat. It might not seem like much now when prices seem low but keep an eye out for any changes in pricing.
- Fuel economy is important too.
In conclusion, financing a boat or house is not so different from funding any other type of asset. It all comes down to understanding the risks and ensuring you have the right loan product for your needs.