Negotiating Interest Rates On Your Next Boat

This thread is a partner to one on negotiating for a lower price on your next boat. The two threads have been copied/pasted from another forum. I am the original author of both threads and posted this one in May, 2004. In the 10+ years the two threads have been on the other forum they were made 'sticky' threads and remained at the top of the page they are on. In that time, they have gotten almost 128,000 page views.

I hope you can get some tips from what I'm sharing to help you get a lower interest rate on your next boat purchase. BTW, these tips also work for cars and trucks, RV's, etc.

Here's a link to this same thread on the other forum if you want to go over there to read all of the comments people have posted.....
http://www.boatingabc.com/forums/ubbthreads.php/topics/33003/1/Negotiating_Interest_Rates_on_.html

Enjoy......
"I'm not sure how many boat buyers realize that the rates you get from a boat dealer are often negotiable. Here's how it works.....

The dealer will be set up through one or more banks to do "direct loans" for the bank. This means that you can do all of the paperwork at the dealership without having to go to the bank.

The dealer "buys" loan money from the bank at a discount to what he "sells" the loan to the customer. This is a HUGE profit center of any dealership...a dealer can make as much profit from the loan as he made on the sale of the boat. This profit is often used to offset a particulary good deal ("low ball price") on a boat he really wants to get rid of because it's been in inventory a long time.

The dealer's rate from the bank is called the "Buy Rate" and the rate he gives you has a variety of names such as "Retail Rate". The more loans the dealer does through a particular bank, the cheaper he gets the Buy Rate. Banks also frequently offer loan rate specials to dealers. This additional discount gives the dealer an incentive to place his loans through that bank rather than the competitor banks.

As an example of how much profit there could be for the dealer, take a loan amount of $40,000 at 6% for 15 years. That loan will have a payment of $337 and a total interest charge of $20,757 (assuming the loan is not paid early). If that dealer's Buy Rate for that loan is 4.5%, the total interest charge would be $15,079 or a difference of $5677. This difference is called "Finance Reserves" Of that Finance Reserves difference, the dealership might get to keep as much as 60%, or $3406.

If you're a boat buyer with very good credit (Credit score of 700 and up) and have a good down payment (10-20% or more plus the taxes and license fees) you very likely may be able to negotiate the rate you are charged for your loan as part of the total purchase package.

If you could talk the dealer down just 1/2% (to 5.5%) in my example above your payment would go from $337 to $326. That $11 bucks a month might as well stay in your pocket as go to the bank."

Great resource Mike- it should be considered for a sticky here as well.


1983 Present 42 Sundeck
Twin Lehman 135's

One of the advantages of a management and finance major is learning a few of those tricks. 45 years ago a professor told me to make certain a dealers loan had no prepayment penalty Line up your own loan directly with a bank. Negotiate the price of the car very tightly. Just let the rate quoted originally stand. Do all the negotiating on the car. Do the deal with dealer financing Then pay the dealer's financing off with your direct loan commitment from the bank. It worked in 1963, and still works today.

Mike, the way the example reads, dealer buying the loan money from a lender to lend, suggests the dealer is on full recourse,which the dealer has to cover. May or may not be, full recourse is not that unusual.

If you can, depending on lending rules, and if your home is paid for, you can negotiate a homeowner line of credit. Available in Canada up to 70% of your home value, at 3% interest rate. No restrictions on rapid repayment.

Don, good point about checking for prepayment penalties. Most loans these days are simple interest loans with no prepayment penalties. It's always good to check though. Whether or not you want to pay a dealer-arranged loan immediate (vs waiting 90 days) could make a difference in a future relationship with your dealer or brokerage. If they got paid the "finance reserves" and then have to give that back to the bank because you chose to pay the loan off early ain't going to make you the apple of your dealer's eye. If you need to have a good ongoing relationship with him you may want to reconsider paying it off immediately.

BruceK, the dealer agreements that are signed with the bank generally will absolve them of any recourse on the loan. They are paid the "finance reserves" for arranging the loan with that bank, doing the paperwork, and delivering the boat/car/truck to the buyer. The dealers don't actually "buy" the money from the bank (as they might if they kept it in a separate account until they used it). The rate they get from the bank ("buy rate") is called that to differentiate between that and the customer rate.

saltcod, as a retired financial advisor I would never counsel someone to use their home equity to buy what essentially is a toy. We've seen from recent history that things can go bad in a hurry. If a person got into a position where he had to give his boat/car/truck back to the bank because of a change in his financial situation, it's one thing to give the boat to the bank. It's a whole different world to have to give his home back to the bank because that's the collateral on the loan.

Putting the two different collaterals on a risk/reward continuum, it's much riskier to use your home as collateral.

Mike, the way I see it the dealer is playing you for max profit. If you are not aware of something, he will take advantage I learned way back when I was in the wholesale lumber business that friendship had a value. That value was about $.25 per thousand board feet. Business is business. If the dealer is trying to blindside you on the deal, why not the other way around.

Most of my vehicles have been bought on the internet or via fax from the best deal in about a 200 mile radius. I just picked up a trailer in Ocala, FL last week that was bought on the internet. All I want is a good business deal.

By the way doc fees, ADP, paint protectant, striping, and who know what else are just ways to add profit to the car. ADP is not spelled out, but is added dealer profit. What you don't know will hurt you.

Remember Rule of 78 financing? Many people would not keep a car until it is payed off before trading. In that case you would pay much more interest than a simple interest loan. That is the loan the dealer was trying to hang on me in 1963. Your right. His finance man was pissed when I came in with a check to pay off the loan.

GFC said:

saltcod, as a retired financial advisor I would never counsel someone to use their home equity to buy what essentially is a toy. We've seen from recent history that things can go bad in a hurry. If a person got into a position where he had to give his boat/car/truck back to the bank because of a change in his financial situation, it's one thing to give the boat to the bank. It's a whole different world to have to give his home back to the bank because that's the collateral on the loan.

Putting the two different collaterals on a risk/reward continuum, it's much riskier to use your home as collateral.

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Well, my home is worth ten times what I paid for my boat so I'm not too worried about it. I also have much more than the value of the boat in low risk locked -in investments that are doing much better than 3%. It just didn't make sense to break into them. I get your point about putting up the farm, but I would never buy a boat so expensive that if things went sideways I would have to give it, or my home back to the bank. I would just take the money out of the bank and pay out the loan.

Saltcod, you're lucky enough to be in a position that many people aren't. Lots of people HAVE to finance a boat if they want one. That's on top of car loans, mortgages, credit cards, student loans, etc.

If they were to use the house for collateral and the proverbial feathers hit the fan, they could lose the thing that's most valuable to them.....their home.

The boat is the only thing we owe money for. No other debt whatsoever. Kids are finished university and on their way. I own with a partner, a very good business, the building that houses the business, and the building next door, plus a small apartment building, so the price of the boat is tiny compared to our total equity. I wouldn't consider using equity from our home if it was not paid for. We only recently completed the deal on the boat, and we are not in possession of it until the weekend. We have been very careful, and could have bought it from savings, but the rate was so low on the home owner LOC that is made no sense to cash out any invested money that was producing at a higher rate.
I do see a lot of people, unfortunately many the age of my kids, ( late 20's) who need to have all the toys. Big fancy house, boat, diesel pickup, SUV, and 5th wheel travel trailer, all on payments. It must be overwhelming at times.

I plan on winning the Powerball Lottery in the next few months. I'm simply waiting until the pot of gold gets big enough to warrant taking $5.00 US from my home equity line of credit.

An acquaintance of mine won the 6/49, the Canadian equivalent of the power ball. I think it was close to 50 million. He moved his family to the big city, where they bought country, which is a costly way to go. They have more and bigger toys now, lots of horses, which they were into before, but I'm pretty sure they are not any happier. It is great to have a windfall, but gawd it feels great to earn your way. ( not that I'm anywhere remotely close to the 50 million mark)

My two favorite quotes from songs:

Dust in the Wind, by Kansas; "And all your money won't another minute buy"

Soak Up the Sun, by Sheryl Crow; "it's not having what you want, it's wanting what you've got"

And that my friends is the bottom line for me.

Howard

Interesting information. I didn't realize financing was so lucrative.
I've never really looked into it too much, as I refuse to borrow to buy something that depreciates.


I guess that's why I drive a 25 year old car and a 30 year old boat.

hmason said:

My two favorite quotes from songs:

Dust in the Wind, by Kansas; "And all your money won't another minute buy"

Soak Up the Sun, by Sheryl Crow; "it's not having what you want, it's wanting what you've got"

And that my friends is the bottom line for me.

Howard

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AMEN; MS. CROW NAILED IT friend of mine was a finance man at a local BMW dealer, screwed people every day on financing

I've owned a number of businesses over the years, by far the most enlightening from a financial perspective was the car dealership. Most days they didn't give a rats a** about the front end of the deal. All the money was made in the back end. ( finance, insurance, add on's etc. ) sad thing was the people who could least afford the extras were the one's who always bought them.

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mbevins said:

I've owned a number of businesses over the years, by far the most enlightening from a financial perspective was the car dealership. Most days they didn't give a rats a** about the front end of the deal. All the money was made in the back end. ( finance, insurance, add on's etc. )...

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I believe dealers make more money from servicing than sales.
Disappointing dealers on add-ons is easy. Finance?,no it`s cash. Insurance? already arranged. Paint protection? What!? you mean the paint on the new car I just bought is really crap? And so on...

Whatever happened to undercoating and rustproofing?

hmason said:

Whatever happened to undercoating and rustproofing?

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Over here it`s more about window tinting, paint & interior trim "protection". Rust proofing was big until car makers got good at it and Alfa stopped importing cars as submarine deck cargo. We don`t have the snow/salt issues to combat .

Depending on the tax laws of your home country, in addition to being able to write off any interest costs on your boat loan, all operating expenses can be deducted as well. If you are in the marine business, as I am, all moorage, maintenance, depreciation, and fuel expenses can be recoverable as a cost of doing business. It really is not fair to the everyday hourly worker, but it makes owning a boat almost free.

AusCan said:

as I refuse to borrow to buy something that depreciates.

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Smart approach.

I was given a piece of advice by a family friend back when I was in my late teens. This fellow was a very successful self-made entrepreneur: one of his achievements was conceiving, starting, and guiding to success a company he named Telecheck.

His advice to me was never finance your toys. And I, and after marriage we, never have, regardless of the size or cost of the "toy."

Marin said:

Smart approach.

I was given a piece of advice by a family friend back when I was in my late teens. This fellow was a very successful self-made entrepreneur: one of his achievements was conceiving, starting, and guiding to success a company he named Telecheck.

His advice to me was never finance your toys. And I, and after marriage we, never have, regardless of the size or cost of the "toy."

Click to expand...

Full agreement with you. I never finance toys. I always finance cars as a rule. The philosophy is that they are a depreciating asset. As such I treat them as a monthly transportation expense just like power,water,gas,etc. You budget what you will and that determines what you drive. Only cars that change this are the toys. My Porsche as an example is a toy thus cash is the rule. Debt sucks.

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And I have a different take the on this. A depreciating asset will depreciate no matter how you pay for it. If I buy a boat for $250K, why would I lay out all that cash? At under 4% interest, over 20 years, and a tax deduction on the interest, I would rather work with the bank's money. Further, I have access to the cash I didn't layout for other purposes or investments. The odds are I will never pay off the boat "toy" so why pay for it in its entirety on day one?

Our first boat, a 26' ranger sailboat, was paid for cash, by way of an investment we cashed in. In retrospect, seeing the growth in the investment we took money out of ( not all of it), we should have financed it, as year over year, that investment has way out produced the historically low interest rates of the past decade or so. When we sold the boat, we put the money down on our mortgage.

well since my philosophy makes no sense I share it but do not preach it

I do not borrow money

Yet I am an active investor for a living and I make more money investing WAY MORE

then interest rates

so this may be one action I just can not justify

Here is how I determine how to pay for expensive goods (depreciating or not):
If the interest rate to finance a purchase is higher than what my money is making, I will pay for the purchase in full.
On the other hand, if the interest rate to finance is less than what my money is making, I would elect to finance as it would make no sense to deprive yourself of that extra income even if the difference was just 1%.

I don't see the point of laying out the full price of a boat when if in fact you financed it the odds of paying it off are slim. I'm talking about a price of 6 figures or more financed over 20 years or so. If you kept the boat 10 or 15 years and then sold it you would never have laid out the full value. You would have had the use of your money over all those years. To my way of thinking, unless the $$ are of no consequence to you, it is false economy to part with the full price on day one. The interest represents a small price to pay for the use of someone else's money.

Also, whether a purchase is paid outright or financed, there is an interest cost. If financing, you pay a loan interest and when paying in full you pay interest in the form of lost income in whatever your money was in.