Lenders have tightened up their loan approvals, including those regarding boats. An offshoot of the much broader and more sinister subprime real estate lending debacle, which became evident about a year ago, marine lenders are pointing to the overall disruption in credit markets that have thrown all consumer loans into turmoil. The result is that potential borrowers will need higher credit scores, lower debt-to-income ratios, and larger down payments.
These tighter requirements shouldn’t derail many boat loan approvals. They raise the bar about five to 10 percent. For likely approvals, credit scores will need to be above 680, required down payments return to the historic 10 to 15 percent level, and debt/income ratios should drop to about 50 percent or below, which many average consumers should consider reasonable.
What’s off the table are no-documentation loans, subprime borrower profiles, no-money downs, prospects with more debt than assets to balance it and no options to pay only interest and forgo principle. In hindsight, lenders look at those practices and ask themselves, “Why did we do it?”
Boat-loan performance has held up pretty well compared with the whole basket of consumer loans on lenders’ books in previous downturns of the U.S. economy. During economic contractions, non-performing boat loans increase along with all other product loans. However, boat loans have lower delinquencies and defaults compared with the others.
The National Marine Bankers Association has been keeping track of what happens to boat loans in past recessionary periods. Their statistics are worth review and revisiting by the industry and lenders (i.e. take this page to your bank).
The number of lending sources almost always declines during recessions, and this is happening now. Getting positive, realistic information to new sources as others exit will help ensure adequate funding when the upturn comes. Please see the historical data in the accompanying chart.
State of marine floorplanning
These are trying times for the industry in regard to floorplan loans, yet they are not as dire as in earlier economic contractions. During that 1990 recessionary period, which dragged on for 18 months, one-quarter of marine dealers were forced out of business, resulting inventories were dumped on the market, causing a significant drop in new boat value and an estimated negative impact of 40 percent on used products.
Dealers (and boat builders and motor makers) and lenders appear to have been more cautious about the floorplan process because of this and other past challenges. In earlier downturns, lenders were quicker to seize inventories and allow them to be resold at deep discounts — which hurt everyone involved.
More recent examples show a restraint by manufacturers in asking retailers to take too much product and willingness by lenders to work out the excess, instead of flooding the market with it. The most dramatic example of this was in 2001 when Outboard Marine Corp. shut its doors, leaving its inventory bare at retailers across North America. The major underwriter, TransAmerica Finance, now GE Capital, quickly instituted programs to work out the inventory, saving hundreds of retailers from certain bankruptcy and significant writedowns on its balance sheet.
Since then, NMBA lending reports show, in addition to personal guarantees of the business owner, floorplan loans have gained protection in growing manufacturer repurchase agreements, better remarketing plans available in the industry, and realistic extension of curtailment timing and repayment amounts to reflect the state of the market. There is better dialogue among all parties involved, and some lenders have developed business-counseling programs to help clients work through the difficult period.
The best lesson learned over time is that regular and honest communication between lenders, dealers and suppliers is the way to manage market disruptions and accommodate the different demands of each respective business. The path to a mutually preferred endpoint requires a little patience and willingness to listen to business partners.