Boat buying debt

Tell the what, when, where, why's of boat buying debt.

As an aside, here's something interesting, or scary:

https://www.usdebtclock.org/

I try to avoid it. Maybe buy a slightly lesser boat than the ideal one you have dreamt up in your mind. Personally I would never own a boat that I could not walk away from. A few thousand in a loan to fill a gap or outfit a boat nicely but a mortgage? probably not.

I did have to put part of my engine rebuild on a credit card but retired the debt in less than a year, from cashflow.

pete

IMHO you can toss out all the rhetoric about getting a boat loan and look at one thing: Can You Afford It?

After you answer that positively you then can start shopping around for a boat loan. A big part of the interest rate you will get will depend on your FICO score, or also known as your credit score.

The higher your credit score the lower the interest rate you will get.

Again, IMHO, if your credit score score is low that means you have had some hiccups in your ability to repay your loans and credit card debt.

You would do yourself a favor if your credit score is low to hold off buying a boat (or car, truck, etc.) and take care of the hiccups. That will get your FICO score raised which will in turn get you a lower interest rate boat loan and that, in turn will save you money on your boat loan.

I don't understand the question. My hunch for those in the TrawlerForum demographic, most either pay cash, collatoralize with a mortgage or similar, or tap a generous line of credit. My sense is most in this group view debt for discretionary items as either an evil encumbrance or an opportunity to arbitrage interest rates.

What exactly is the exam question?

Peter

I know yacht brokers will cringe but I think with boats if you can't write a check you should think thrice before buying it. Boats come with a lot of expenses for moorage, maintenance, and general upkeep. They're not like a car where they are a necessity and have relatively minor maintenance costs.

I think a significant factor is how your portfolio's rate of return compares to the interest rate on your loan. With mortgage rates around 5% you may be able to borrow money for free.

With the yield curve inverted as it is, it would seem the market is expecting interest rates to fall.

If we had waited until we saved enough to buy a boat for cash we would have missed out on more than 20 years of fun and family memories. My wife was once a bank teller. She has many stories of couples who saved their entire lives only to see one of them pass away and leave their spouse with thoughts of what could have been. We decided long ago to save what we could but still have fun, however within a budget. Now we're on boat number 6, none of them completely paid for when we moved up. We owe money on our current (last?) boat but the payments are well within our retirement budget and if we sold the boat tomorrow it's worth far more than what's still owed on the loan. Have some fun now while you can, within reason, because tomorrow might not turn out the way you think. Just my opinion.

porman said:

If we had waited until we saved enough to buy a boat for cash we would have missed out on more than 20 years of fun and family memories. My wife was once a bank teller. She has many stories of couples who saved their entire lives only to see one of them pass away and leave their spouse with thoughts of what could have been. We decided long ago to save what we could but still have fun, however within a budget. Now we're on boat number 6, none of them completely paid for when we moved up. We owe money on our current (last?) boat but the payments are well within our retirement budget and if we sold the boat tomorrow it's worth far more than what's still owed on the loan. Have some fun now while you can, within reason, because tomorrow might not turn out the way you think. Just my opinion.

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Not a bad plan. Everyone is different so if it works for you then go for it. We are on boat #24, some we paid cash for some we financed.

If I had to take out a loan to buy a boat I wouldn't have owned one.

I did take out a loan to buy a house.

So I guess I would take out a loan to buy a houseboat -

I don't see a boat as comparable to a house unless you plan to live on it. You need some place to live. Either your buying or renting. A boat is discretionary spending.

I can think of few things that can change the cost of ownership as much as a boat. The fluctuation in the price of fuel, dockage, insurance, maintenance materials, and maintenance labor costs can truly crush a long term budget for ownership expenses. There have been several threads on the forum about overall annual expenses as a percentage of boat purchase price. If you purchased a boat 4 years ago, I would imagine 2023 is going to be a painful increase to the percentage of the original purchase price.

I don't finance discretionary purchases, but understand the reluctance to liquidate assets, pay capital gains tax, for something you can easily afford. I can also see the advantage of locking in an incredibly low interest rate and making the payments with dividend income as opposed to selling a steadily growing investment. But my gut feeling is that most people who finance boats can't afford them otherwise, and often can't afford to use them during hard economic times.

Ted

porman said:

If we had waited until we saved enough to buy a boat for cash we would have missed out on more than 20 years of fun and family memories. My wife was once a bank teller. She has many stories of couples who saved their entire lives only to see one of them pass away and leave their spouse with thoughts of what could have been. We decided long ago to save what we could but still have fun, however within a budget. Now we're on boat number 6, none of them completely paid for when we moved up. We owe money on our current (last?) boat but the payments are well within our retirement budget and if we sold the boat tomorrow it's worth far more than what's still owed on the loan. Have some fun now while you can, within reason, because tomorrow might not turn out the way you think. Just my opinion.

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Thats the way I did it!

The only difference is that I set my retirement date and cleared all debt prior to that date. My boat loan was paid off two months before I retired.

Personally I have to pay cash for a boat. If I lose interest in the boat and am not using it and have a $2000 a month payment as an example, Then in 10 months I'll have lost $20,000. And that doesn't include dockage, insurance, maintenance etc. Being in that position, it would force me to take less for the boat. Being able to make the payment doesn't factor in my way of thinking it that scenario.

Benthic2 said:

I think a significant factor is how your portfolio's rate of return compares to the interest rate on your loan. With mortgage rates around 5% you may be able to borrow money for free.

With the yield curve inverted as it is, it would seem the market is expecting interest rates to fall.

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That's definitely a factor. In some cases, it makes sense to finance a purchase even if you could afford to buy it outright.

Beyond that, for boats, it depends on the capital cost of buying the boat vs the operating costs. If the capital cost outweighs the annual operating cost by a large enough factor, financing is more likely to be necessary unless you're sitting on a big pile of money. If the ratio is smaller, then financing is more likely to be a product of not really being able to afford the boat. In other words, nobody should be financing an old 40' trawler that's selling for $40k unless they somehow manage an incredibly low interest rate and could afford to buy it outright anyway. At that price range, not being able to buy it outright is often pretty close to not being afford to maintain and operate it, as you could easily be spending 25% or more of the boat's value on dockage and other costs every year.

Think about it this way. Someone wants to buy a new Helmsman 38. We're talking about a boat in the $600k ballpark. Yes, the person could just buy a cheaper boat instead, but in the $600k range it's quite easy to have a situation where someone can afford the loan payments and operating costs of the boat, but would have to put their dreams off for a few more years to have a big enough lump of cash to buy the boat outright. In that situation, especially if they can get a good enough rate on the loan, the extra years of having the boat is likely worthwhile.

I pay cash for cars and boats, but have debt against my home.

I'm still not quite sure how to look at that. I could spend less on boats and owe less on my house, so in a sense I'm borrowing money to support my boating habits. Not having any difficulties paying the mortgage though.

rslifkin said:

Think about it this way. Someone wants to buy a new Helmsman 38. We're talking about a boat in the $600k ballpark. Yes, the person could just buy a cheaper boat instead, but in the $600k range it's quite easy to have a situation where someone can afford the loan payments and operating costs of the boat, but would have to put their dreams off for a few more years to have a big enough lump of cash to buy the boat outright. In that situation, especially if they can get a good enough rate on the loan, the extra years of having the boat is likely worthwhile.

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That works until the economy goes into recession, the used boat market tanks, the stock market tanks, and the company you work for goes out of business. None of it's your fault other than the debt to sellable equity ratio.

Ted

O C Diver said:

That works until the economy goes into recession, the used boat market tanks, the stock market tanks, and the company you work for goes out of business. None of it's your fault other than the debt to sellable equity ratio.

Ted

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Agreed, there's always some risk in owing money for anything. That's when you have to look at your sources of income (and their stability), how much money you have in the bank, value of assets vs amount financed, etc. to determine how much risk you're taking and what's acceptable to you.

FWIW...I've always paid cash and personally wouldn't finance a boat purchase unless I had the cash tied up in a CD, bond, or something along those lines. Also, I have never bought a boat and NOT put, usually thousands into it after purchase. If I don't have cash for something along the lines of.a.boat...I downsize my requirements.

O C Diver said:

That works until the economy goes into recession, the used boat market tanks, the stock market tanks, and the company you work for goes out of business. None of it's your fault other than the debt to sellable equity ratio.

Ted

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I generally agree that ending up in a weak position due to changes in market value and liquidity (time required or expected to convert an asset to cash) is a risk worth considering.
But do we really know how much volatility there is in boat values or time required to liquidate over time?
For example, on a mainstream model such as a Mainship 390 or some such that has been around a long time, if we plotted annual market value for an average example over 20 years to include all parts of economic cycle, is it really that erratic?
I clearly do not know the answer to this, but I suspect it is not highly volatile. In general, luxury is the least sensitive category to economic cycles.
Now, if you have a one off, or a crappy example of a mainstream boat then you are likely at more risk to economic cycles. The bottom end of quality will be more sensitive for sure.
I am old school. I pay cash for toys. I am likely to enjoy my boats less if I am writing checks against it every month. I also pay my moorage annually.
But I recognize that on a purely financial basis this can be a poor decision in some cases. Then there is a whole other level of analysis when it comes to life expectancy and the 'go now' question.
As with most things, it depends.
As someone else suggested, it is probably a more important question to understand that if you are borrowing money to buy the boat, have you reserved enough cash to maintain it in all regards like insurance, moorage, maintenance and repairs? In aggregate, these will add up to significantly more than the mortgage payment.

Always folding for toys
Borrowed for income.
And as of a few weeks ago, now debt free.

klee wyck said:

Now, if you have a one off, or a crappy example of a mainstream boat then you are likely at more risk to economic cycles. The bottom end of quality will be more sensitive for sure.

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Not really arguing, but this is not always the case. Many years ago I was selling higher end production sailboats. In a downturn cheaper boats were selling fine while the market for our boats was pretty skinny. In good times people were happy to pay a premium, in bad times they still bought boats but were more price concious.

As always, there are few universal truths

rslifkin said:

That's definitely a factor. In some cases, it makes sense to finance a purchase even if you could afford to buy it outright.

Beyond that, for boats, it depends on the capital cost of buying the boat vs the operating costs. If the capital cost outweighs the annual operating cost by a large enough factor, financing is more likely to be necessary unless you're sitting on a big pile of money. If the ratio is smaller, then financing is more likely to be a product of not really being able to afford the boat. In other words, nobody should be financing an old 40' trawler that's selling for $40k unless they somehow manage an incredibly low interest rate and could afford to buy it outright anyway. At that price range, not being able to buy it outright is often pretty close to not being afford to maintain and operate it, as you could easily be spending 25% or more of the boat's value on dockage and other costs every year.

Think about it this way. Someone wants to buy a new Helmsman 38. We're talking about a boat in the $600k ballpark. Yes, the person could just buy a cheaper boat instead, but in the $600k range it's quite easy to have a situation where someone can afford the loan payments and operating costs of the boat, but would have to put their dreams off for a few more years to have a big enough lump of cash to buy the boat outright. In that situation, especially if they can get a good enough rate on the loan, the extra years of having the boat is likely worthwhile.

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Inflation changes a lot of rules of thumb.

It pushes up boat interest rates

It also pushes up the purchase cost.

The $600k Helmsman base price was more than $100k less 12-18 months ago. Had someone borrowed, the savings would pay a lot of years of loan interest.

That price hike is not unique to that boat. Not by a long shot. That math is, I think, less than some other brands. And it’s still a bargain compared to similar choices.

The overall thought of don’t be foolish is spot on. Exactly what is foolish can vary. Each person’s circumstances are different.

To each their own. I just follow whatever plan I have that allows me to sleep well at night. Personally, I prefer no debt.

We (OP) are following all your comments and appreciate them. There's nothing for us to add right now but really do thank all of you for your time.

This borders on a thread about the best anchor...if you are capable of managing your finances you will decide how best to allocate current cash/liquid assets, future income and retirement planning. There is no right or wrong here.

Interesting range of perspectives and good points on each side. I can certainly see that if to raise the money you'd incur capital gains taxes and if the interest rate is at or below the return on your investments that taking a loan could be better from a finance point of view. I may have to rethink my hard position against it.

There is no one single right or wrong way to boat ownership and boat loans because all of our circumstances are different. I don’t try to tell someone else that their method is right or wrong, that would be very presumptuous of me since I am not in their situation. And I prefer that others don’t tell me that what I do is wrong either.

A mortgage for a home is usually less than the value of the home. So why would you finance a boat in a way that the value of the boat is less than the loan.
If you tire of the boat and sell, the proceeds should pay off the loan.

Unless you live on the boat, it is a toy, best to pay cash, but if you must finance to meet your dreams, finance no more then the resale value maintained as the loan is paid off.

Boat Buying Debt

It's such a personal and potentially complicated issue depending on your financial situation and your level of comfort with debt. Some people are not comfortable with any debt. Some people are leveraged way beyond their means but walk away rich. If passage-making is something that you've always wanted to do but you haven't even bought a house yet. Maybe you don't want a house and mortgage a boat instead. For some people living on a boat and cruising the world is how they want to live their life and they make their living online. It makes total sense to them but not to someone who just uses the boat for the occasional weekend getaway.

It's a question that can only be answered by you and maybe your accountant and/or money manager, lol.

Good Luck

On this TF forum, when this question comes up, it's pretty clear that most of the contributors have a choice about borrowing for their boat. Some may use a loan to stretch a bit for a larger boat, but for the most part, no 'hard-lender' stories.

On the sail-oriented CruisersForum, when the question comes up, the OP is usually confounded by rejection as they seek a loan for a cheap liveaboard. Responders are typically low-budget cruisers giving advice to scrimp and save and by a 40-year old 36-footer for $15k.

Context is key.....

Peter

A contrarian point of view, stolen from the Facebook loop page:

"To be truly challenging, a voyage, like a life, must rest on a firm foundation of financial unrest. Otherwise, you are doomed to a routine traverse, the kind known to yachtsmen who play with their boats at sea... cruising, it is called. Voyaging belongs to seamen, and to the wanderers of the world who cannot, or will not, fit in. If you are contemplating a voyage and you have the means, abandon the venture until your fortunes change. Only then will you know what the sea is all about. "I've always wanted to sail to the south seas, but I can't afford it." What these men can't afford is not to go. They are enmeshed in the cancerous discipline of security. And in the worship of security we fling our lives beneath the wheels of routine - and before we know it our lives are gone. What does a man need - really need? A few pounds of food each day, heat and shelter, six feet to lie down in - and some form of working activity that will yield a sense of accomplishment. That's all - in the material sense, and we know it. But we are brainwashed by our economic system until we end up in a tomb beneath a pyramid of time payments, mortgages, preposterous gadgetry, playthings that divert our attention for the sheer idiocy of the charade. The years thunder by, the dreams of youth grow dim where they lie caked in dust on the shelves of patience. Before we know it, the tomb is sealed. Where, then, lies the answer? In choice. Which shall it be: bankruptcy of purse or bankruptcy of life?"