Boat loans are changing with the times

It’s not a return to the days of easy money, but financing is readily available and approvals are up

Trends in the marine credit market might not be stellar, but they are encouraging. Credit is available for boat loans, interest rates are at historic lows, loan criteria are easing a little and a few more lenders are getting into the market, financial consultant Jim Coburn says.

“If a customer comes in and he’s paying his bills and has a down payment, he’s going to get a boat loan,” says Coburn, a former president of the National Marine Bankers Association who now operates Coburn & Associates LLC in Macomb Township, Mich.

Don Parkhurst, another former NMBA president, agrees. “There’s plenty of money available at historic low rates and more people are getting approved today than several years ago,” says Parkhurst, senior vice president for marine and RV finance at Sun Trust Bank.

That’s good news for dealers, even if sales projections for 2012 are nothing to write home about. “Overall new-boat sales in 2012 will range from flat to modestly improved,” Coburn predicts. That modest improvement has been evident in first-half sales and the credit picture has modestly brightened as well.

For buyers with good credit scores, fixed-rate loans have been running 4.5 to 5.5 percent — “among the lowest we’ve ever seen,” Parkhurst says. These days, a good credit score is 700 and up. (A perfect score is 850.) “By today’s standards, anything below 690 is considered non-prime,” he says. “Some lenders draw the line at 700 or 720.”

For most qualified buyers, down payments are 15 to 25 percent and terms are 15 to 20 years. (A boat valued at $75,000 to $100,000 or more usually qualifies for a 20-year loan; less than $75,000, 15 years; less than $50,000, 10 to 12 years). These are standard credit criteria, but a few lenders are taking a more aggressive tack and offering 10 percent down payments and even “zero-down” programs, Coburn says. A few have been quoting rates as low as 3.99 percent on 5-year terms. Pre-approval programs with no- or low-documentation requirements have largely vanished since 2007, but Coburn expects these types of programs to re-emerge — with tighter guidelines and better credit management tools — late this year or in 2013.

Loans despite blemishes

Bigger loans ($100,000 and up), shorter terms and higher credit quality fetch the lowest rate — 4.5 percent — but buyers needn’t count themselves out just because they’ve got a couple of blips on their credit record. Parkhurst says that about a third of banks will consider lending to buyers with credit scores of 640 to 690, and Coburn notes that two Utah lenders, Merrick Bank and Medallion Bank, and a third in Texas, Marine One Acceptance Corp., specialize in non-prime loans, usually less than $75,000.

Merrick will consider applicants with credit scores as low as 580; Medallion touts its “premier rate” at 9.95 percent. However, Parkhurst says non-prime rates can jump to 15 to 17 percent, depending on a borrower’s qualifications.

The best way to qualify for a non-prime loan is for buyers to show that their finances are on the mend — they’ve got a new job, they’re bringing home a good salary, they’ve paid off their credit cards, caught up on their home mortgage payments, Coburn says. “Banks recognize that there is a flood of people out there who, through no fault of their own, lost their job but have gotten through it and now have a blip or two on their credit record because of the recession,” he says.

Some of these lenders are going to be willing to look a little closer at deals where they see buyers can put 25 percent down and have done a lot of hard work to repair their finances, he says.

But be aware: Collateral rules — the formulas lenders use to determine a boat’s value — are stricter than they used to be, and lenders these days are sticking to them. Coburn says that’s not a bad thing. It makes for fewer bad loans, strengthens the marine credit market and makes it more attractive for lenders to get into.

Caution and scrutiny

Post-recession, lenders are more cautious and are looking closely at credit applications that might have gotten a quick once-over before the downturn. Application forms include, among other information, employment details, income, rent or mortgage payments, and assets and liabilities, including bank, investment and retirement accounts, real estate holdings, vehicles and boats, secured and unsecured loans and credit card debt.

Applicants must provide proof of income — current pay vouchers and/or tax returns — and lenders today expect an applicant’s debt-to-income ratio to be 35 to 40 percent. Improved borrower and income-verification processes are in place, again to reduce lender risk and ensure that the borrower has the discretionary income to afford a boat.

Lenders who stuck out the recession and stayed in the marine credit market are “doing a doggone good business” again, Coburn says. This has enticed some new players — mostly state, regional and local banks — into the marine credit field and drawn others back into the market as boat sales slowly have improved. This is increasing the credit volume for boat buyers. However, Coburn does not expect new lenders to come onto the scene anytime soon with national loan programs.

“Growth [in the marine credit market] is going to be an organic thing,” Coburn says. He foresees new entries starting small, expanding as boat sales grow and moving slowly outside their regions. He puts the number of banks and other financial institutions that originate boat loans at 22 and the number of loan service companies, which find loans for buyers, at 38.

Two banks — First Federal Lakewood (Ohio) and Community and Southern Bank of Atlanta — entered the marine credit market in 2011. Bank of America, after discontinuing its lending through boat dealers in 2010, now makes boat loans directly to consumers. Coburn says two Midwestern lenders also are eyeing the boat market. “Banks are coming out of their funk,” he says. “They need to make loans. They have to balance their portfolios,” which tend to be heavy on commercial, real estate and mortgage loans.

Refinancing on rise

With interest rates at historic lows, refinancing boat loans has become a big part (20 to 25 percent) of many lenders’ businesses. A boat owner who wants to refinance might have to pay down some cash to make up for the boat’s decline in value during the recession, Parkhurst says, but boats bought just before or during the recession — after 2007 — probably haven’t lost much value and might actually have gained some. They would be good candidates for refinancing without bringing any money to the table.

Seventy-six percent of marine retail lenders reported more bookings in the fourth quarter of last year than in the same quarter in 2010. Most of the loans were for used boats; about 25 percent were for new boats. But Coburn says delinquencies have declined from a high of 2.26 percent in 2009 to 1.69 percent in 2010, and the trend is continuing.

Stocks of repossessed boats are way down and the prices they fetch started going up again last summer. Coburn believes these conditions are good for new-boat sales, but the consumer continues to hold back. “A lot of people want to pull that trigger, but they haven’t yet,” he says. Tepid consumer confidence, high unemployment (8.2 percent in June), sluggish housing starts and slow growth in light vehicle sales all signal more of the same in the boat market — slow growth, he says.

In these roller-coaster times, Parkhurst says, lenders are competing with cash (among better-heeled buyers) as the preferred method of paying for a boat. “Self-employed individuals are a big part of our market [at Sun Trust],” he says. “They’re doing a lot better. They’re looking to buy a boat. When we talk to these customers, they typically have cash. We haven’t seen so much cash on their balance sheets in a long time.”

Often these buyers would rather pay cash for a boat than assume more debt in an economy in which they still don’t have a lot of confidence. By paying cash, these buyers also come out ahead financially, Parkhurst says. If their money is in a bank account, it may be earning 1 percent interest, he explains. If they take out a loan to buy the boat, they’d likely be paying the bank 4.99 percent interest. “I’ve been in this business for over 30 years and I can’t remember cash ever being our big competition,” Parkhurst says.

There are a couple of dark clouds on the horizon: GE Capital remains the dominant player in floorplan loans to dealerships and, with the exception of Northpoint Commercial Finance LLC, there appear to be no other contenders for a piece of that market. Coburn says credit volume is sufficient to meet today’s floorplan needs, but when boat sales accelerate, a shortage of credit for inventory could become a choke point and inhibit industry growth. Coburn says the industry needs more players in floorplanning.

The industry also is closely following the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was adopted two years ago. It is concerned about disclosure requirements for, or even prohibitions on, finder’s fees that lenders pay to boat dealerships and service companies that send loan business their way. “That would be the end of the service companies,” Coburn says. “The fees are their main source of revenue.”

This article originally appeared in the August 2012 issue.