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Marine lenders were recently asked why most had reported reduced boat loan volume and they pointed the offending finger back at themselves: rising installment interest rates. They had the option to blame rising gas costs and a few other economic challenges, which they did, but put rates at the top of their concerns.
At first glance, this may appear illogical. Over the past 12 months, the average price of a gallon of gas has climbed from roughly $2 to $3 a gallon, or 50 percent. In the same period, 10-year Treasury Note rates, often a benchmark for boat loans, have increased about 100 basis points to about 5 percent, up 25 percent (however, these rates have since begun to slightly retrench). Perhaps borrowers place a higher concern on a loan payment that remains fixed over a 10-year horizon than on fuel, that, depending on their vehicle, will be used up over the next several hundred miles – and by then (and there) the price may have dropped by 10 percent.
From a historical perspective, boat loan interest rates are cheap. Nobody likes to pay more interest than necessary, but the old rule of thumb suggests that until rates eclipsed 10 percent (which they did in the early 80s), boat buyers wouldn’t be dissuaded. Boat loan down payments have also eased over the years, starting at 20- to 25-percent and now averaging 5- to 10-percent, with “zero down” a growing option (prudent or not).
Potential borrowers may also be focused on their overall debt levels, even though many economists suggest consumers are not drowning in debt. Recent headlines on declining home values, which consumers can no longer “tap” for equity loans, must be a growing factor in deciding to acquire – or postpone – desired durables, including boats. (Home equity loans are supposed to be used for home improvements and may fund education or medical needs, but there appears to be little actual tracking of where the money ends up.)
These developments actually argue for a return to promotion and use of the bonafide marine collateralized loan. Foremost among boat loan benefits is its longer terms – 10-, 15- and in some cases 20-years – which translate to lower, more affordable monthly payments. Because the terms are longer (than, for example, auto loans) they also reflect lower interest rates. And if the loan is for a boat with living accommodations (berths, head and galley), interest paid is likely to be deductible from federal taxes (always consult a tax expert). In sum, the qualified buyer doesn’t need to worry about falling home equity in deciding to go forward with a boat acquisition.
There’s more. Marine lenders are agreeable when it comes to loan add-ons. These can include desired accessories, navigation gear, a step-up in power or extra sails. Many are happy to roll sales taxes and loan costs (if any) into the financed amount, and why not? It’s more income for the lender. That means the buyer can have the boat her way without much increase in monthly payment, again, because the terms are longer and rates more competitive.
Doesn’t everybody selling boats know these things? Probably. But where are the reminders in the showrooms, in the ads and on the pre-owned Web sites? Back to the basics means showing the boat price, deducting down payment and applying the longest terms and most competitive rates to the balance resulting in a monthly ownership cost of “only $X.” If applicable, a reminder of interest deductibility should also be underscored.
Many loan benefits, and some promotional aids, have been neatly packaged at the NMBA’s Web site, www.marinebankers.org on the trade side. Visit there for ideas and consider sending customers there, too. It’s time to remind old salts and new prospects that financing makes boat ownership probably more accessible than they thought.