Prime and subprime customers receive loan approvals, though lenders are being more diligent
Consumer financing has leveled out. It’s great news for consumers trying to get loans, dealers and manufacturers selling units and anyone else in the industry that relies on increased boat sales.
Customers with credit scores under 600 are even being financed for smaller boats, and new lenders are entering the market as they see the performance of boat loans returning to pre-recession levels. It’s a welcome sign for dealers whose biggest snag to closing a deal can be financing the eager prospect.
“The lending situation, compared to the last few years, it’s certainly stricter than pre-recession levels, but over the last couple years, it has stabilized,” said Scott Ward, vice president of Brunswick Financial Services and president of Blue Water Finance.
Though lending is heading in a positive direction, it’s also evolving. Creditors have learned lessons from the recession and have changed some of the ways they do business. Most are looking harder at customers’ credit profiles and verifying the applicants’ information more consistently than was done in the past.
“They’re verifying information, as far as making sure that the buyer is the buyer, and they’re making sure the person made how much they said they made, or is employed where they’re employed,” explained Nicole Armstrong, vice president of sales and marketing for Priority One. “A lot of times they would ask for references, but they never would follow through; not anymore, they’re checking to make sure that those references are actual references. They’re checking to make sure the customer has taken delivery of the unit, that they’re going to actually keep it where they’re saying they’re going to keep the unit. They’re just doing their due diligence.”
In addition to a credit score, lenders are looking closely at a customer’s work history, residency, second source of repayment, liquid assets and credit utilization. For larger boats, they’re looking at proof of liquidity, net worth, tax returns, income verification and prior boating experience.
Most lenders are also looking at the commitment to a boat, in the form of 10 to 20 percent down, which many customers are willing to make as interest rates for CDs and bank accounts remain low.
“I actually tend to think, especially in non-trailerables, there’s a trend that they’re putting more money down than they used to,” said Michael Bryant, president of the National Marine Lenders Association and principal of Trident Funding Corporation.
For those who don’t have a minimum of 10 percent down, some zero-down options are still available, though they’re not as common and not offered by as many lenders.
“There are a few lenders who are offering zero down, but the customer must have it all; everything must be in line to qualify,” Ward explained.
When banks are approving loans, they’re studying valuations more closely, another lesson that came from the recession. In the past, many lenders would simply loan out 80 to 90 percent of the sale price as long as guide values were close, in the case of used boats. However, that’s how many were burned during the recession.
“In a lot of cases, they found that the boat valuation as it related to advancing money was probably a lot higher than what it should been,” Bryant said.
Now lenders are doing their own research and approving loans based on the valuations they’ve discovered.
“They’re looking very closely at valuation,” Ward said. “Should any negative equity exist, it does need to be paid off or solved for. Market value is reviewed very, very closely and is a factor in how much money the bank will lend against a specific piece of collateral. It is weighted more heavily in today’s environment.”
Rates and customers
Though lenders are learning more about buyers and their boats before loaning money, they are still offering low interest rates.
“Rates still remain stable; they haven’t really gone up much since bottoming out probably a year and a half ago,” Bryant said.
Many lenders are offering prime customers APRs in the mid- to high-4 percent range. Bryant, who remembers the 20-plus percent rates in 1980s, says consumers will consider financing as long as rates remain under 10 percent.
“Ever since the crash of 2008, there hasn’t been a rate issue as an impediment at all,” he added.
Though subprime buyers don’t receive the interest rate offers that their prime counterparts do, they are being financed at a steady rate. While prime lenders are looking for credit scores in the high-600s, those operating in the subprime space will approve loans on lower credit scores, however the rates and down payments are higher.
“Blue Water Finance successfully places loans with credit scores from 525 to the perfect score of 850,” Ward said. “Prime lenders provide the most competitive market rates and terms to customers with better credit profiles. Subprime lenders lend money to credit challenged customers today, which allows the customer to begin enjoying the new boat while repairing their credit profile.”
Lenders see value in the subprime arena, especially as many consumers lost points in their credit scores only because of a layoff or other financial hit. A lot of those customers are now back on their feet and looking to build positive payment history.
“It’s just people who have imperfections in their credit profile due to a situation, not necessarily habitual, and those customers — 35 percent of the market — really need [lenders’] attention, and it pays off,” Armstrong said. “It pays off for the dealers, the manufacturers; everybody benefits, and those customers do, too. We have seen where they appreciate the time it takes, and it does take time.”
About three years ago, Priority One created a Specialty Finance Department to focus on subprime customers. That department has seen the most growth since its inception, and it has bigger goals for 2014 and beyond. Because it was created to help subprime customers get approved for loans and rebuild their credit, Priority One is already seeing repeat customers returning because the company was willing to work with customers with a few hiccups on their credit profile.
“What we found is those customers are loyal,” Armstrong said. “If you can take the time with them and walk them through the process and make their finance experience pleasant and streamlined, and you have an open dialogue with them, they are loyal and will come back to that dealership. We are seeing repeat [buyers] because they’re looking to improve their credit, so they’re looking to have this next purchase put them on the path for success and to make their credit process easier next time, so that’s kind of what we’ve found that’s really helped us.”
Armstrong said making a recreational purchase, such as a boat, using a loan is ideal for consumers looking to rebuild credit.
“This is a great way for you to be able to establish a good payment history and to pay it on time every month and to keep that loan for a couple years so that a bank sees you as a viable option,” she said.
New lenders in the market
Though the number of lenders that are offering consumer financing to boat buyers has remained relatively unchanged over the past few years, there are new entrants, presenting fresh opportunities to the industry.
“During the recession, a number of national and regional lenders left the business. With marine loan performance returning to pre-recession levels, those that remained in the business are enjoying the recovery. In addition, a few new lenders have come in, which is great for our overall business and the industry,” Ward said, adding that Blue Water Finance has recently added three new lenders to their organization.
Drawing lenders in is the market’s history, which has traditionally been positive, except during the recession. Lending in the marine market often means banks gain access to customers with higher net worths to whom banks can offer more products.
With new lenders coming in to pick up the slack where former lenders left, the industry overall is seeing the benefits, as banks need to pick up loans in order to make money.
“The banks are competitive. They do have to offer competitive rates; they understand that they need to get the business. That’s kind of the nice thing; there’s just enough where they’re competing against each other,” Armstrong said.
All of this combined proves that the lending situation for the marine industry is heading in a positive direction, a benefit to all involved.
“Boat lending is available,” Bryant said. “There are a lot of lenders that are very eager to make loans. Certainly they’re going to be careful about granting the credit and approving the loan, but they certainly want to put the money out for boats. That’s as true now as it was a few years ago.”