Purchasing a boat, whether it's for leisurely fishing trips or for thrilling watersports, is an exciting prospect. However, buying a boat is also a significant financial commitment which usually requires some form of marine financing to lighten the load. One of the most crucial factors to consider when exploring your boat loan is the term length, which can significantly influence your monthly payments and overall cost. In this post, we'll cover how boat loans work and dig into what boat loan term may be best for your situation.
Boat Loan Basics
Just like an auto loan, boat loans are usually structured in installments. You borrow a certain amount of money and pay it back, along with interest, in installments over a pre-determined period. Typically, the loan payments are amortized so that the bulk of the interest is paid at the onset of the boat loan term. Unlike auto loans, however, there comes a higher risk for lenders who offer boat loans.
Luckily, in Canada, there are multiple options when deciding on a boat loan option. Your bank or credit union may provide you with an unsecured boat loan with favorable interest rates, but this typically requires an excellent credit score. For others with less than perfect credit qualifications, you'll still find multiple lenders with a variety of opportunities. Some marine dealers will offer a secured loan for a boat purchase from their selection of new or used boats.
You can also explore online lenders to apply for a boat that you wish to purchase from a private seller. These are usually secured loans with an interest rate that varies based on your credit situation. The advantage of an online lender is that they usually have access to multiple lenders to get you set up with a loan term that fits your budget and the best boat loan rates available.
Regardless of your choice, your boat loan term may vary widely based on lender restrictions. These are generally tied to the cost of the boat, the borrower's credit score, and whether the applicant is shopping for a new boat.
In Canada you will be looking at average boat loan term that ranges anywhere from 2 years (24 months) up to 20 years (240 months). Next we will compare different lengths of boat loan so that you can make the decision that best fits the monthly payment that you are looking for.
Short-Term Boat Loans (2 to 5 Years)
A short term boat loan in Canada can span anywhere from two to five years. These loans typically appeal to borrowers who can afford higher monthly payments, are looking for an inexpensive new or used boat, or want to pay off their boat quickly to save on interest. The advantage of a short-term boat loan is that you will end up paying less interest overall. Shorter terms also typically come with the advantage of a lower interest rate as the risk for the lender is decreased. The caveat, however, is that these advantages come with a higher estimated monthly payment which could put a strain on your budget. In addition, a lender may not allow for these shorter terms for many boat loans due to it's effect on debt to income ratio and high monthly payment call.
These boat loan terms are best for boat buyers who:
- Have cash up front but would rather spread payments out over a short term boat loan.
- Have a good credit score who were declined for a boat loan through their bank or credit union.
- Have a good credit score who may have been offered personal loans from their bank with a small loan cap that doesn't cover the price of the boat.
- Have higher than average monthly income who can afford a large payment.
- Have a large down payment which makes the boat loan manageable.
- Are aiming for used boat loans under $10,000.
Mid-Term Boat Loans (6 to 10 years)
Mid-term boat loans usually extend from six to ten years in Canada. This middle-ground option can be attractive if you're seeking a balance between affordable monthly payments and a reasonable total loan cost. Lower interest rates may still be offerd in this range, though it will likely be a bit higher than the average interest rate of a short term loan. It's important to consider, however, that the boat's depreciation rate might still outpace your loan repayment, potentially leaving you with a boat worth less than what you owe on it.
These boat loan terms are best for boat buyers who:
- Have a small down payment, but are still looking for a manageable monthly payment.
- Have a fair credit score, but do not qualify for boat financing with their bank or credit union. Online lenders typically offer these term lengths.
- Are aiming to get a boat loan to build their credit score.
- Are looking at boat purchases in the $10,000 to $20,000 range while still having an affordable boat payment.
- Have average to lower income and want their boat loan on manageable monthly payments.
Long-Term Boat Loans (11 to 20 years or more)
Long-term boat loans start around 11 years and can go up to 20 or even more in some instances. These are usually reserved for more expensive vessels, such as yachts or high-end motorboats. Long-term loans result in the lowest monthly payments, making the boat more affordable on a month-to-month basis. The downside is that you will end up paying more overall due to the extended period of annual interest accrual. Additionally, long-term loans pose the risk of being "upside down" on the loan, where the boat depreciates faster than the loan is paid off. Finally, due to the increased risk of these boat loans, you'll likely be looking at interest rates that are a few points over and above the average interest rates of a shorter loan term. Some private asset lenders don't allow term lengths over 10 years due to this depreciation.
These boat loan terms are best for boat buyers who:
- Are looking for a boat loan on an expensive watercraft.
- Are shopping for a brand new make or model and looking at boat financing through a manufacturer.
- Are fine with paying more interest over time if it means lower monthly payments.
- Have a top tier credit score but lower income and need lower monthly payments to keep their debt to income ratio within reason.
How a Down Payment Can Get You a Better Option
Having a down payment on your boat loan can lead to a much better result when you're shopping for the best boat loan option. While many boat buyers may not have cash to put down, it may be wise to save up prior to applying for financing. This is because a down payment will lower your overall principal balance from the onset affording you the possibility of borrowing for a shorter time than the average boat loan term while also paying less interest. This is especially true if the approval is offered to you at a higher interest rate due to poor history and a low credit score.
Our Boat Loan Calculator
At Boat Loans Canada, we're proud to offer you the most powerful boat loan calculator to estimate your monthly payments with ease. We allow you to set your interest rate, term lerm length, payment frequency, down payments and even include estimates for dealer fees and sales tax.
It is important to remember that not every boat loan is created equal and the options that you are offered may be much shorter or longer than the average boat loan term. Marine lenders typically will get you pre-approved on the onset so that you are aware of your interest rate and can use this calculator to get an accurate cost before you borrow money.
Learn how our calculator works here: Guide to Using Our Boat Loan Calculator
Check out our tool here: Boat Loan Calculator
In Conclusion
Securing boat loans in Canada will come with a number of facets to consider before putting pen to paper. Choosing the right boat loan terms for your boat financing is a balancing act between managing affordable payments and minimizing total loan cost. Consider your personal financial situation, the type of boat you're purchasing, and your long-term ownership goals. And of course, remember to shop around with different financial institutions to find the best boat financing rates and terms.
Remember, owning a boat is not just about the purchase price. It's important to factor in the costs of insurance, maintenance, storage, and operation when budgeting for your dream boat purchase.
Making an informed decision about your boat financing will ensure that your boat ownership dream is a pleasure, not a burden. Your adventure on the open water awaits, and with the right financing plan in place, you'll be ready to set sail in no time.