CA$H or Finance??? Bet you didn’t know…

A Line of Credit is a demand product. This means your bank has the option of increasing your interest rate by any amount, at any time. This is in addition to any increase in the Prime rate which is the base rate for your LOC. ALL Canadian Banks launched Line of Credit re-pricing programs this year. Some banks increased rates by as much as 300 bps.

A small increase is no big deal. What’s the worst that could happen?

An increase in Prime and/or your interest “surcharge” would mean your minimum payment could increase without warning, leaving you with a payment you might not be able to afford or with less of that payment going towards paying down the principal.

But a lower rate today is still better, right?

A variable rate also means you have no way of knowing up front how much interest you will actually be paying by the time the LOC is completely paid off. Aren’t interest costs one of the main reasons for considering a variable rate today? And yet a variable rate LOC doesn’t give you the security of knowing the final cost for your loan that a fixed rate does.

I can always lock in with a new loan!

Thinking about “locking in” down the road with a fixed rate loan when the variable rate on your LOC starts to rise? Chances are fixed rates will have risen as well, leaving you potentially locking in at a rate higher than being offered to you now.

My job is secure; I plan on paying it off pretty quickly.

Economic uncertainty is all around us at the moment. If your LOC is tied up to purchase your “toy”, do you have enough reserve to see you through an unexpected change in your financial situation? What about that leaky roof or other unforeseen expenses that have a way of cropping up at the worse possible moment? A lot of people keep their LOC available for these unwelcomed surprises, but it’s not a given that your bank will approve an increase to your LOC to cover these costs. Also, LOC’s typically have scheduled interest only payments which need to be made each month. Without principal payments being applied to the balance it can be quite easy to find yourself in a tough situation when it is time to buy a new recreational toy but haven’t yet paid off the old one.

The economy is going to start getting better soon. Rates aren’t going to rise for awhile, are they?

The Cost of Funds has risen recently and banks will have no choice but to eventually begin passing those costs on to you. You may not be able to control global credit issues and fluctuating market conditions, but choosing a fixed rate is something you can control and know your finances are safe.

A PLOC is:

• callable at the bank’s whim
• variable at Prime plus something. The bank can change that something whenever it wants
• variable based on Prime that the Government sets
• the real never – never plan: see the chart below
• often secured by your house, limiting your borrowing ability
• your access to emergency funds
• your Financial Flexibility

“Interest Only” options means you are never paying down the borrowed amount against your depreciating asset! What if you had to sell quickly? Where would the shortfall come from?

Minimum payments aren’t contributing to your outstanding balance significantly. So, even with a lower rate, you are paying more interest dollars over time. And it’s really about dollars not rate!

The Bank will set you up once with a PLOC and count on you using it. They have no administrative costs. They likely even charged you to set it up! And they are counting on you keeping it full. Minimum payments ensure they are making maximum profit.

Maintain your financial flexibility! Keep you PLOC for family emergencies or quick access to money.

Having your money work for you is the easiest way of earning money. As you know your investment can earn a lower rate than the borrowing rate for your boat and you can still be ahead in the interest game. We would be happy to take a look at the numbers with you.
The banks have an ideal type of loan for making major purchases. It’s not your Line of Credit either! This special type of loan is called a Conditional Sales Contract (CSC), and is only available through your qualified dealer, not even at the branches!

A good loan is more than just rate. It is all the terms and conditions. A CSC is wide open, so no penalty for early pay-out. It won’t tie up any of your collateral other than your purchase. Extended amortizations are available. This keeps your payment down, which could be handy if you are using this as “bridge financing”. Attractive interest rates can be fixed for the term. Repayment protection can be applied for added piece of mind.

A solid “liquid” position gives you power and flexibility. Why give it up to pay cash for your boat? Use the banks’ money and maintain your strong position and keep the flexibility that a proper toy loan can offer you. Thanks for your time, and I hope to see you in the Great Outdoors!

Will Walker, President, Walker Financial Services
Your Leisure Pursuits Loan Specialists

Update: 2010 While this is an older article, it is still accurate.

Unless you plan to pay cash for whatever boat you buy, you will require some form of financing. If this financing is not available from friends or family, chances are you will be dealing with some type of lending institution. Although some purchasers will obtain pre-approval for the maximum amount they can afford, it’s not necessary because most marine sales contracts can be written as conditional on the purchasers obtaining acceptable financing. Here are just a few financing options to consider.

DEALER PLAN FINANCING

Most dealers of new boats offer “in-house” financing. Their source of financing may be the vessel manufacturer, through its consumer finance division, or it might be through the “dealer centre” of a chartered bank, credit union or other consumer lending service. Some larger dealers offer the purchaser access to this financing through an in-house “business office” while others will outsource this service to a private company that acts, de facto, as their business office and that itself has a relationship with the dealer centre at a number of financial institutions.

Either the dealership or outsource business manager will assist purchasers in completing a financing/credit application to be submitted to the ideal source of financing for approval. Typically this application will include the specifics of the boat being purchased and the financial details of the transaction—for example, the purchase price, applicable taxes, down payment, details of any tradein or lien buyout, the balance to be financed, and, as with any kind of borrowing, the purchasers’ confidential financial information.

Regardless of what form it takes, dealer plan financing offers certain advantages over consumer-direct borrowing. First, because the purchaser is applying for financing through a dealer who is part of a huge “buying pool,” interest rates are generally lower than those available to purchasers dealing directly with their own bank. Second, dealer plan loans are secured only by the vessel being purchased via either a simple lien or a marine mortgage depending on the size of the vessel (i.e. no personal guarantees or other collateral are required).

Third, the term and amortization available on dealer plan loans are usually longer (e.g. five-year term, 20-year amortization), which can result in lower monthly payments, and the balance of the principal amount can usually be reduced or paid out entirely, at any time, without penalty.

Fourth, the purchaser’s credit rating determines the amount of the down payment required, which can be as low as 0%, although down payments of 15% to 20% or more are typical and will result in the lowest interest rates and payments.

And last, during normal business hours the approval of finance applications through the dealer usually takes a matter of hours as opposed to days or weeks.

All that said, dealer plan financing is only available on new or preowned vessels in the inventory of a dealer who has been pre-approved for membership in the dealer pool of one or more financial institution, not on pre-owned vessels sold on brokerage/ consignment or privately. The most prominent local outsource dealer plan service provider is Walker Financial Services.

BANK LOANS

Purchasing a new or pre-owned vessel from a dealer’s inventory doesn’t mean you must finance it through their dealer plan if they offer one. Most major banks are happy to discuss marine financing directly with the purchaser, especially those with whom they already do business and/or who have an excellent credit rating. Branch level financing will likely be either a personal loan or a personal line of credit.

However, one should not assume that every branch of every bank will be sufficiently experienced in marine financing to ensure a smooth and issue-free application, approval and funding process. This is especially true when purchasing larger, more expensive vessels. The banks have placed their marine loan experts in the dealer centres where they are able to focus on their specialty.

To facilitate a sale, most boat dealers/ brokers can provide a list of those lenders who understand the financing of pleasure craft. Of course, the purchaser can seek out a bank, a branch of that bank and a loan officer at that branch that can demonstrate a proven track record of financing pleasure craft. If your branch can’t prove that it does, ask them to recommend another of their branches that can.

Personal loans from banks may have stricter qualification requirements and/or less flexible terms, shorter terms and/or amortization, and require additional collateral or security.
Depending on the amount to be financed, bank customers might also want to inquire about a personal line of credit. Some of these can be totally unsecured, while others—usually the ones for larger amounts—require security in the form of liens or other encumbrances against the vessel or other owned property. The line of credit may have a lower initial rate; however, it will most likely be a floating rate that will fluctuate based on the prime rate.

Regardless of what financial instrument you and your bank mutually agree on, if you are buying a pre-owned boat the bank will require you to provide, at your cost, a current marine survey and mechanical inspection to ensure the vessel is a good “risk.” (These are a very good idea regardless of if they are required by the bank or not!) New or pre-owned, depending on the amount of the loan and size of the boat, they may also register a lien or marine mortgage against the vessel, which, again, will be at your cost.

HOME (PROPERTY) EQUITY

Today’s rapidly escalating real estate prices have resulted in many homeowners enjoying significant increases in home/property equity. At the same time, mortgage money is available at near-record low rates—certainly lower than the rates a bank would charge for a personal loan or line of credit.

It’s no surprise, then, that boat dealers/ brokers are finding more and more purchasers, especially among graying baby-boomers and empty nesters who are obtaining the necessary funds to make their boating dreams into reality by either increasing the existing first mortgage on their home or other owned property, or taking a second mortgage.

Lawyer’s fees for writing the mortgage may apply. Repayment of mortgages will have more restrictions than dealer loans and some branch level loans.

Keep in mind your whole financial picture and try not to limit your financial flexibility. The low interest rate of a mortgage on your house comes with a few strings. Make sure you understand them.

MARINE FINANCE BROKERS

If your dealer doesn’t offer in-house financing or if, for whatever reason, none of the other options given are available, ask your dealer or the person you’re buying the boat from about contacting a local marine finance broker who, usually for a fee, will research all the available financing alternatives and recommend the one best suited to your needs and personal circumstances. Because they have access to funds from lenders other than the major banks, including private lenders, this could prove to be the best course for those whose credit is somehow impaired and who are not put off by the potential for higher costs.

Rick Francis heads the powerboat division of Westerly Yacht Sales, is a Certified Yacht Broker (CYB), a director of the BCYBA, and member of the Vancouver Boat Show advisory committee. 96 • February 2006 • www.pacificyachting.com