In 2020, more than 300,000 boats were sold in the United States — the highest annual boat sales in more than 13 years. Even amidst a global pandemic, boat sales have shown no signs of slowing down, either, with a good portion of those future boat sales being purchased with the help of a boat loan. Whether you’re buying a small skiff or your dream yacht, though, navigating the details of boat financing can be a bit confusing.
To help you along the way, here is a glossary of the most important terms you may come across when applying for a boat loan, and what each of these means.
Glossary of Boat Financing Terms
Your loan’s amortization is a schedule calculated by your lender. It determines how much of your monthly payment is allocated to the principal balance and how much goes toward interest throughout the life of your loan.
APR (Annual Percentage Rate)
A loan’s APR, or annual percentage rate, represents the total amount that the loan will cost a borrower each year in interest and other finance charges. Depending on other applicable fees, a loan’s APR may or may not be the same as its interest rate.
A borrower is someone who takes out a loan from a lending institution — such as a bank or credit union — to fund a purchase with the agreement to repay that debt in the future according to the terms of that loan.
A co-borrower is a second individual (such as a spouse) who is added to a loan or other debt agreement, and shares in the financial obligation of that debt. With co-borrowers, both individuals are equally responsible for the repayment and equally share ownership of the asset, with both individuals’ income and credit scores being taken into account when qualifying for the loan.
A co-signer is an individual who agrees to lend their creditworthiness to another borrower who may not otherwise qualify for a loan on their own. In this case, the co-signer agrees to have his or her credit history and income taken into account when underwriting the loan. If the primary borrower defaults on the loan, the co-signer will still be held financially responsible for its repayment.
Collateral is an asset that is pledged to a lender and used to secure a loan. If a borrower defaults on a loan backed by collateral, the lender can seize (or take possession of) that asset, which could include savings accounts, real estate, vehicles, boats, and more.
The three credit bureaus — Experian, Equifax, and TransUnion — receive and track consumer credit data, such as open lines of credit, existing debt, and payment history. When a lender pulls a borrower’s credit, they will receive a copy of this data in the form of a consumer credit report, which is also used to calculate a borrower’s credit score.
A credit report is a record of an individual’s consumer account history, including all consumer lines of credit, loans, inquiries, and more. These reports, which are maintained and provided by the three credit bureaus, typically show a consumer’s recent inquiries, installment loans, revolving lines of credit, current outstanding balances, payment histories, and more. This data is used to determine a potential borrower’s creditworthiness, or how likely they are to repay a new debt as agreed.
Calculated with the data from an individual’s credit history, a credit score is a three-digit number used to indicate how responsibly someone has managed consumer debt in the past. This number — which can range from 300 to 900, depending on the scoring model used — plays an important role in being approved for new accounts or determining the rates and loan terms that new lenders are willing to offer. Learn how to raise your credit score when you’re ready to apply for a boat loan.
Credit utilization, typically expressed as a percentage, shows how much of an individual’s available credit is currently being used. For example, if a borrower has a $4,000 balance on a credit card with a $10,000 limit, they are utilizing 40% of their available credit.
Debt-to-income ratio (DTI)
An individual’s debt-to-income ratio, also called DTI, is an expression showing how much of one’s income is spoken for by their current debt burden. If a borrower earns $10,000 per month, for instance, but their existing loans and lines of credit require minimum payments totaling $4,500, their DTI is 45%. Boat lenders tend to prefer a DTI of 40% to 50% (or lower), including your new boat payment.
If a borrower fails to make their debt payments on-time and as agreed, their account may go into default after a period of time. It may then be sent to a debt collection agency, and the collection and/or default status could be reported to the credit bureaus, which could adversely affect one’s credit score.
Some lenders may require a borrower to put up a portion of their purchase, also known as a down payment, with the remaining balance being financed by a loan. The down payment required (which may be 10% or 20% for a boat loan) can vary from one lender to the next and also relies on factors such as the item being purchased, loan repayment terms, and the borrower’s creditworthiness.
A boat purchase is considered financed if it is funded with the help of a boat loan or line of credit from a lender. When financing a purchase, a lender fronts the money and the borrower agrees to repay those funds — plus any applicable interest and fees — over a predetermined period of time.
Fixed interest rate
A fixed interest rate on a loan (or other consumer product) is one that remains the same for the life of that account. Regardless of market shifts or other changes, the interest rate — and therefore, the monthly payment on that debt — remains predictable and static.
Gross monthly income
One’s gross monthly income is the total amount that they earn in a month prior to any applicable taxes, withholdings, or other deductions being taken out.
Hard credit inquiry
A hard credit inquiry, also known as a hard credit pull, is generated anytime a potential lender requests a copy of your credit report for the purposes of issuing a new loan or line of credit for which you’ve applied. This inquiry is reported to the credit bureaus and can minimally impact your credit score.
When borrowing a lump sum to pay for a one-time purchase — such as a boat — a borrower will typically be offered an installment loan. This loan arrangement includes fixed repayment terms for a set period of time, until the debt is repaid.
The interest rate on a consumer product, such as a loan or line of credit, is used to determine the cost of borrowing that money from a lender. It is expressed as a percentage which can be applied to any outstanding balance; depending on other fees and expenses, a loan’s interest rate may or may not be the same as its APR. You can estimate your boat loan rate based on current boat loan rates.
Borrowers are required to make minimum monthly payments on their outstanding balances. If this payment is not received in full by the due date, a late fee, or additional penalty charge, may apply.
A lender is a bank, credit union, or other financial institution that agrees to lend money to a borrower in the form of a loan or line of credit. In exchange, lenders charge interest on the borrowed amount until the debt is entirely repaid. Trident Funding works with a large network of marine lenders to get you the boat loan and interest rate that fits your budget and lifestyle.
When borrowing money from a lender, a loan agreement is the contract that outlines exactly how much is being borrowed, how and when it will be repaid, and any interest charges or fees that the borrower might incur along the way.
A loan limit determines how much an individual is eligible to borrow, based on the lender, the individual’s credit, and what is being purchased. For example, Trident Funding allows qualified borrowers to take out a loan for between $25,000 and $2 million.
Some lenders may utilize a loan officer to help walk a borrower through the loan process. This officer will analyze the borrower’s loan request, credit history, income, and overall eligibility to determine the loan and terms that may be offered. They are also available to answer any of the borrower’s questions along the way.
Most boat lenders will require a marine survey before issuing a boat loan. This survey serves to evaluate the vessel prior to funding, helping to determine its condition, value, and verify certain details.
After taking out a loan or line of credit, borrowers are responsible for making regular payments on that debt in the form of monthly payments. For installment debt like boat loans, monthly payments will typically be a set amount that stays the same for the duration of the loan term. Use a boat loan calculator to estimate your monthly payments or calculate your total loan amount.
An origination fee is an added expense when taking out loans with certain lenders. This fee helps cover certain expenses related to the underwriting, processing, and disbursement of the loan.
Some lenders may charge a fee if a borrower pays off their total loan balance ahead of the scheduled payoff date. If a lender charges this fee, it will be noted in the original loan agreement.
The original amount borrowed with a loan or line of credit is the principal balance. A borrower’s payments may be applied to both the principal balance as well as interest on that debt and any other applicable fees.
With a refinance loan, also called a refi, borrowers take out a new loan that is used to pay off the remaining balance on an existing loan. The old loan is closed out, and the borrower will continue making payments on the new refi loan according to its own unique rates and terms. Generally, borrowers consider refinancing a boat loan if interest rates have dropped or if they need to extend their repayment term. A lower interest rate through a boat loan refinance means you’ll pay more towards your loan principal, so you’ll end up paying less on your loan overall.
A secured loan is one that holds some form of collateral to secure the debt. This collateral may be the asset that’s being purchased with the loan (as in the case of a boat loan or home mortgage loan) or can also be assets like savings accounts. If the borrower defaults on the loan, the lender has the right to seize the secured asset; in the case of a boat loan, the vessel serves as collateral for the lender.
Stated income loan
With a stated income loan, a lender takes a borrower at their word in terms of their current income, rather than requiring evidence in the form of paystubs, W-2s, or tax returns. This is typically only allowed up to a certain income level; individuals claiming a higher income or requesting a large boat loan will often need their income verified for loan approval.
A loan’s term is the agreed period of time that a borrower has to repay the debt in full plus any applicable fees and interest. Boat loans generally range from seven to 20 years in length.
An unsecured loan is one that is based solely on the borrower’s creditworthiness and is not secured by a specific asset, such as a boat or real estate. The borrower is still responsible for repaying an unsecured loan as agreed, but the lender cannot directly seize a specific asset in the case of a default.
Variable interest rate
A variable interest rate on a loan (or other consumer product) is one that can increase or decrease over time. Due to external factors such as market rates, the interest rate has the potential to change, which can also affect the monthly payment required on that debt.