How long did you finance your boat for?

[Soon2BV]

If you finance $40,000 for 15 years, at 6%, the payment is about $350, for a total of payments of $61,000. In total dollars, you pay about $21,000 in interest.

But those dollars are worth less in 2023 than they are today.

Assuming 3% inflation, the present value of those payments is about $49,000. So in effect, by financing,

you are saying you are willing to spend the equivalent of $49,000 of todays money for the boat.

The bank looks at it and says "I give you $40,000 that is worth $49,000". That is why they loan money.

But, they have to pay someone else for that money to loan you. so their profit is somewhere between 0 and $9000.

If you have the option of borrowing the money or investing it, the break even point is about a 3% return on your investment. If you can earn more than that, you should borrow the money for the boat. If you can earn less than that, you should pay cash (purely from a financial standpoint).

The reason you only need 3% return to balance a 6% rate on the loan is that the money you invest is going to compound, you earn 3% on the extra 3% and on that extra 3% for 15 years. On the loan, you are paying 6%, but the balance you are paying 6% on continues to go down over the life of the loan.

From a risk and total financial picture, it is an individual choice on what makes most sense. Cash and most market investments are very 'liquid' and can be tapped in an emergency. Having the $40K in the bank might make sense. Having a paid off boat, but no money in the bank, could make things challenging if there was an emergency need for cash.

If your option is finance the boat and have one, or not have a boat, then it comes down to deciding if the $40,000 boat is worth paying $49,000 for.

[powderski14]

The dealer i am dealing with is giving me a price of 39000....Right away i am putting a 2000 deposit on the boat then come spring when i pick it up i will be putting another 5000 down and finance the rest which should be arouns 32000 for 15 years hoping to pay it off within 5-10....I'm only 22 so buying the whole boat in cash is out of the question. But i figure i will have this boat for 10-15 years. What do you guys think of my situation is it smart?

[Soon2BV]

This sounds interesting.

Are you buying the boat now, or just putting a deposit to hold it for you until spring?

It probably makes sense to try and finance in the spring vs. right now - money is tight, even with good credit, while the current financial situations get worked out. Hopefully for us all things will be better in 6 months.

The downside is you are committing today to something several months away. If the economy does not improve, you could be 'overpaying' for your boat.

Also i wonder what are the terms of your 'deposit'? What happens if you do not take the boat in the spring? do you lose the $2000?

If it is the boat you want, and you are getting what youthink is a fair price, then it sounds good. Just wondering about some of the questions above to protect you from the uncertainty of the next several months.

[Bobby Light]

The dealer i am dealing with is giving me a price of 39000....Right away i am putting a 2000 deposit on the boat then come spring when i pick it up i will be putting another 5000 down and finance the rest which should be arouns 32000 for 15 years hoping to pay it off within 5-10....I'm only 22 so buying the whole boat in cash is out of the question. But i figure i will have this boat for 10-15 years. What do you guys think of my situation is it smart?

I will bet you any ammount of money you want you will not own that boat for 10-15 years.....

[powderski14]

The dealer i am dealing with is giving me a price of 39000....Right away i am putting a 2000 deposit on the boat then come spring when i pick it up i will be putting another 5000 down and finance the rest which should be arouns 32000 for 15 years hoping to pay it off within 5-10....I'm only 22 so buying the whole boat in cash is out of the question. But i figure i will have this boat for 10-15 years. What do you guys think of my situation is it smart?

I will bet you any ammount of money you want you will not own that boat for 10-15 years.....

Maybe i won't but i want a boat next summer to enjoy with my friends....riding behind a jetski and pontoon boat sucks....i can afford a 300-350/month payment and prob a lil more so hopefully i will have my leftover iride next spring

[REW]

The dealer i am dealing with is giving me a price of 39000....Right away i am putting a 2000 deposit on the boat then come spring when i pick it up i will be putting another 5000 down and finance the rest which should be arouns 32000 for 15 years hoping to pay it off within 5-10....I'm only 22 so buying the whole boat in cash is out of the question. But i figure i will have this boat for 10-15 years. What do you guys think of my situation is it smart?

I will bet you any ammount of money you want you will not own that boat for 10-15 years.....

Maybe i won't but i want a boat next summer to enjoy with my friends....riding behind a jetski and pontoon boat sucks....i can afford a 300-350/month payment and prob a lil more so hopefully i will have my leftover iride next spring

Check the used market, there should be some good deal that will keep the cost down and give you the ability to have a good ride. It is easer to upgrade later than feed a boat you are having trouble paying for. I picked up a used 04 wakesetter for 26K last year in the winter. Be prepared by getting preapproved for the loan and start looking. There are people trying to stay out of bankrupcy and may be willing to part with a boat at less than current value.

[swankrides]

"LOL, I got lucky, we built at the right time in the right place! I did alot of manual labor myself, which saved cash, but not back aches!"

We are in a similar boat (pun intended), we built a house at the right time and three years later sold at the right time and made a boat load (last pun, I promise). Boat is paid for and we are getting ready to build another house that will be paid for. Real estate has been good to us even though it has slowed down recently.

[The Voodoo Cowboy]

I financed my boat for 12yrs @ 4.99% through Bank of America. I broke even on my trade and got 7k off msrp on my vRide. I'll keep my boat for 2 yrs then do it all over again.

[Olivertuft]

I financed my boat for 12yrs @ 4.99% through Bank of America. I broke even on my trade and got 7k off msrp on my vRide. I'll keep my boat for 2 yrs then do it all over again.

Go Ducks!....Great job last weekend.

No Roses for the beavs.

[Matts88Skier]

I financed my boat for 12yrs @ 4.99% through Bank of America. I broke even on my trade and got 7k off msrp on my vRide. I'll keep my boat for 2 yrs then do it all over again.

You may have "broke even", but you're still out the interest you paid, the fees to have your credit checked, the fees to have the finanacing paperwork drawn up, etc.

The only debt I have is 50% of my home. Home aside, my wife and I believe that if you can't afford to pay for it up front and still have enough left over to live comfortably, you can't afford it.

Edited December 5, 2008 by Matts88Skier

[The Voodoo Cowboy]

I financed my boat for 12yrs @ 4.99% through Bank of America. I broke even on my trade and got 7k off msrp on my vRide. I'll keep my boat for 2 yrs then do it all over again.

You may have "broke even", but you're still out the interest you paid, the fees to have your credit checked, the fees to have the finanacing paperwork drawn up, etc.

The only debt I have is 50% of my home. Home aside, my wife and I believe that if you can't afford to pay for it up front and still have enough left over to live comfortably, you can't afford it.

Trust me, I'm still able to live comfortably and could pay my boat off tomorrow if I so chose to do. I would never over extend my debt to income ratio if I couldn't afford something. The fact is, I would rather have the money in the bank and fork out a small monthly payment for my toy. Besides, like I said, i'll trade it in for an upgrade in 2 years and decide wether or not I want to finance again or pay cash. The 7k I got off of msrp + the 2 yrs of payments with interest should allow me to break even on this boat as well. If not I guess I'll end up paying more in the long run. Oh well.

[WakeGirl]

The dealer i am dealing with is giving me a price of 39000....Right away i am putting a 2000 deposit on the boat then come spring when i pick it up i will be putting another 5000 down and finance the rest which should be arouns 32000 for 15 years hoping to pay it off within 5-10....I'm only 22 so buying the whole boat in cash is out of the question. But i figure i will have this boat for 10-15 years. What do you guys think of my situation is it smart?

I will bet you any ammount of money you want you will not own that boat for 10-15 years.....

Maybe i won't but i want a boat next summer to enjoy with my friends....riding behind a jetski and pontoon boat sucks....i can afford a 300-350/month payment and prob a lil more so hopefully i will have my leftover iride next spring

Check the used market, there should be some good deal that will keep the cost down and give you the ability to have a good ride. It is easer to upgrade later than feed a boat you are having trouble paying for. I picked up a used 04 wakesetter for 26K last year in the winter. Be prepared by getting preapproved for the loan and start looking. There are people trying to stay out of bankrupcy and may be willing to part with a boat at less than current value.

Nothing is selling right now, almost at any price. I took mine off of the market because I wasn't willing to price it below $40k, & even at that I don't think it would have sold. There are a lot of deals out there to be had, even if at first glance it doesn't look that way because of the way that many people are upside down in their boats. I'm willing to bet that there are a lot of people out there that will either be willing to pay to get out of those loans, or possibly the banks will be willing to negotiate a short sale to get out of a possible repo situation. I suspect that we'll see the market flooded when boat show season arrives.

All of the reasons for not financing a boat are coming around to bite people hard.

[Jimmypooh]

I will bet you any ammount of money you want you will not own that boat for 10-15 years.....

Why would you say that? I'm in almost the exact same situation. I am 25 and bought an 06 VLX with my sister and financed it for for 15 years. We plan to have the boat for a very long time. Our last boat was from 1969. My grandparents bought it new and we still have it. We've finally graduated to a Bu and expect to keep this for many years to come.

The reason we decided to finance for 15 years is because the rates are so low it's not worth paying cash for it. I use ING banking and even a savings is earning around 3% on average. My loan is fixed at 7% so I feel like I'm only paying 4% on my boat and still have the ability to use my liquid money to have fun while I'm young. We could have payed cash for it but we would rather take the 4% hit and have a little more fun. Granted I don't have a Morgage or car payment (rent and payed cash). Now, I'm not saying this is the correct way to go for everyone, but we aren't close to having money problems.

I think everyone's situation is different and therefore their solution may not be the same as yours. As long as you understand your financial situation and values, you should be able to weigh that against the time value of money to figure out what you should do. Let us know what happens!

[JohnDoe]

I will bet you any ammount of money you want you will not own that boat for 10-15 years.....

The reason we decided to finance for 15 years is because the rates are so low it's not worth paying cash for it. I use ING banking and even a savings is earning around 3% on average. My loan is fixed at 7% so I feel like I'm only paying 4% on my boat and still have the ability to use my liquid money to have fun while I'm young. We could have payed cash for it but we would rather take the 4% hit and have a little more fun. Granted I don't have a Morgage or car payment (rent and payed cash). Now, I'm not saying this is the correct way to go for everyone, but we aren't close to having money problems.

To each his own but I do need to point out that if your rate is 7%, and your available savings rate is 3%, then you're paying a practical 10%, not 4%. This of course does not take compounding into effect, which makes the practical rate even higher than 10%, but to each his own.

[Jimmypooh]

I will bet you any ammount of money you want you will not own that boat for 10-15 years.....

The reason we decided to finance for 15 years is because the rates are so low it's not worth paying cash for it. I use ING banking and even a savings is earning around 3% on average. My loan is fixed at 7% so I feel like I'm only paying 4% on my boat and still have the ability to use my liquid money to have fun while I'm young. We could have payed cash for it but we would rather take the 4% hit and have a little more fun. Granted I don't have a Morgage or car payment (rent and payed cash). Now, I'm not saying this is the correct way to go for everyone, but we aren't close to having money problems.

To each his own but I do need to point out that if your rate is 7%, and your available savings rate is 3%, then you're paying a practical 10%, not 4%. This of course does not take compounding into effect, which makes the practical rate even higher than 10%, but to each his own.

Not to be overly confrontational, but the difference of paying 7% and earning 3% is 4%. For example:

Loan amount $50,000

If payed in cash, you cannot earn 3% on the $50,000 that you just spent on the boat, ie. you are loosing $1,500 of interest you would have earned the first year.

If you finance, you paying 7% of 50,000 the first year, paying $3,500 in interest the first year.

Therefore by financing I am paying $3,500 but still earning $1,500 which is in essence paying only $2,000.

$2,000 is 4% of $50,000

You are adding instead of subtracting.

Can someone please verify which logic is correct.

[Bobby Light]

I will bet you any ammount of money you want you will not own that boat for 10-15 years.....

The reason we decided to finance for 15 years is because the rates are so low it's not worth paying cash for it. I use ING banking and even a savings is earning around 3% on average. My loan is fixed at 7% so I feel like I'm only paying 4% on my boat and still have the ability to use my liquid money to have fun while I'm young. We could have payed cash for it but we would rather take the 4% hit and have a little more fun. Granted I don't have a Morgage or car payment (rent and payed cash). Now, I'm not saying this is the correct way to go for everyone, but we aren't close to having money problems.

To each his own but I do need to point out that if your rate is 7%, and your available savings rate is 3%, then you're paying a practical 10%, not 4%. This of course does not take compounding into effect, which makes the practical rate even higher than 10%, but to each his own.

Please explain your math here Doe? How does -7% and +3% = -10%? Are you refering to the tax being paid on the interest he's making on his money he left in the bank?

[Jimmypooh]

Please explain your math here Doe? How does -7% and +3% = -10%? Are you refering to the tax being paid on the interest he's making on his money he left in the bank?

If that is the case you would have to include the tax deduction on the interest being payed, which would make it even less than 4%.

[JohnDoe]

pooh's analysis is correct, but I'm just making a clairification that the "swing" from making 3% and paying 7% is 10%. For example, if invested 50k at 3%, you'd make $1,500. If finance at 7% you pay $3,500. Assuming no compounding and no tax issues, the "difference" between making 1,500 and paying 3,500 is obviously 5,000. 5,000 is 10% of 50k, which is all I'm saying.

pooh, please explain how you get a tax deduction on your interest being paid. First I've ever heard that interest on an asset other than your primary residence can be deducted. True, you would have to pay tax on your interest income, but interest expense is not tax dedcutible to my knowledge.

[Jimmypooh]

pooh's analysis is correct, but I'm just making a clairification that the "swing" from making 3% and paying 7% is 10%. For example, if invested 50k at 3%, you'd make $1,500. If finance at 7% you pay $3,500. Assuming no compounding and no tax issues, the "difference" between making 1,500 and paying 3,500 is obviously 5,000. 5,000 is 10% of 50k, which is all I'm saying.

you are ignoring where the money is in each scenario. I will try to make it more clear, but your logic is incorrect.

Pay 7% of 50k = -3500

And

Earn 3% of 50K = 1500

-3500+1500 = -2000 (4%)

pooh, please explain how you get a tax deduction on your interest being paid. First I've ever heard that interest on an asset other than your primary residence can be deducted. True, you would have to pay tax on your interest income, but interest expense is not tax dedcutible to my knowledge.

Assuming a 30% tax bracket

-3500 Tax break (30%)=-2450

1500 Pay tax(30%)=1050

-2450+1050=-1400

Now I feel like I'm only paying 2.8% (1400/50000)

Can a 3rd party please verify or correct any of this logic?

[Jimmypooh]

pooh, please explain how you get a tax deduction on your interest being paid. First I've ever heard that interest on an asset other than your primary residence can be deducted. True, you would have to pay tax on your interest income, but interest expense is not tax dedcutible to my knowledge.

Yes, you would have to secure your loan via your primary residence.

[JohnDoe]

If you finance $40,000 for 15 years, at 6%, the payment is about $350, for a total of payments of $61,000. In total dollars, you pay about $21,000 in interest.

But those dollars are worth less in 2023 than they are today.

Assuming 3% inflation, the present value of those payments is about $49,000. So in effect, by financing,

you are saying you are willing to spend the equivalent of $49,000 of todays money for the boat.

The bank looks at it and says "I give you $40,000 that is worth $49,000". That is why they loan money.

But, they have to pay someone else for that money to loan you. so their profit is somewhere between 0 and $9000.

If you have the option of borrowing the money or investing it, the break even point is about a 3% return on your investment. If you can earn more than that, you should borrow the money for the boat. If you can earn less than that, you should pay cash (purely from a financial standpoint).

The reason you only need 3% return to balance a 6% rate on the loan is that the money you invest is going to compound, you earn 3% on the extra 3% and on that extra 3% for 15 years. On the loan, you are paying 6%, but the balance you are paying 6% on continues to go down over the life of the loan.

From a risk and total financial picture, it is an individual choice on what makes most sense. Cash and most market investments are very 'liquid' and can be tapped in an emergency. Having the $40K in the bank might make sense. Having a paid off boat, but no money in the bank, could make things challenging if there was an emergency need for cash.

If your option is finance the boat and have one, or not have a boat, then it comes down to deciding if the $40,000 boat is worth paying $49,000 for.

pooh, an earlier post above that explains the "practical" payment being made when financing a toy for long term. It's true that inflation, with taxes, is probably aroudn 3%, which is also why I was trying to demonstrate the 10% "swing". You can spend your money however you want, just offering another perspective.

[Soon2BV]

pooh, please explain how you get a tax deduction on your interest being paid. First I've ever heard that interest on an asset other than your primary residence can be deducted. True, you would have to pay tax on your interest income, but interest expense is not tax dedcutible to my knowledge.

Yes, you would have to secure your loan via your primary residence.

or meet the IRS rules that make your boat a vacation residence.

i have an accountant friend checking the rules on this, but one of the keys is a toilet on board

[Jimmypooh]

If you finance $40,000 for 15 years, at 6%, the payment is about $350, for a total of payments of $61,000. In total dollars, you pay about $21,000 in interest.

But those dollars are worth less in 2023 than they are today.

Assuming 3% inflation, the present value of those payments is about $49,000. So in effect, by financing,

you are saying you are willing to spend the equivalent of $49,000 of todays money for the boat.

The bank looks at it and says "I give you $40,000 that is worth $49,000". That is why they loan money.

But, they have to pay someone else for that money to loan you. so their profit is somewhere between 0 and $9000.

If you have the option of borrowing the money or investing it, the break even point is about a 3% return on your investment. If you can earn more than that, you should borrow the money for the boat. If you can earn less than that, you should pay cash (purely from a financial standpoint).

The reason you only need 3% return to balance a 6% rate on the loan is that the money you invest is going to compound, you earn 3% on the extra 3% and on that extra 3% for 15 years. On the loan, you are paying 6%, but the balance you are paying 6% on continues to go down over the life of the loan.

From a risk and total financial picture, it is an individual choice on what makes most sense. Cash and most market investments are very 'liquid' and can be tapped in an emergency. Having the $40K in the bank might make sense. Having a paid off boat, but no money in the bank, could make things challenging if there was an emergency need for cash.

If your option is finance the boat and have one, or not have a boat, then it comes down to deciding if the $40,000 boat is worth paying $49,000 for.

pooh, an earlier post above that explains the "practical" payment being made when financing a toy for long term. It's true that inflation, with taxes, is probably aroudn 3%, which is also why I was trying to demonstrate the 10% "swing". You can spend your money however you want, just offering another perspective.

If I understood you correctly, you are saying the better option is to pay cash. Again, I think your going opposite of the logic. The 3% inflation would make it a better idea to borrow than pay cash.

Therefore we can rework the final logic as follows:

$50,000 Loan

7% Interest payment

Monthly paying $449.41

Total of $80893.80

However, the further out in the future you pay, the less each month's payment is worth (3% inflation)

$449.41*((.03/12)*Months in the future)

so the last month you are only paying $202.24 (of today's money) and the first you are paying the full $449.41

Therefore you are actually paying $58,648.01 of today's money to pay off your loan

Meanwhile you are earning 3% on the money you did not pay up front ($50,000) but losing 3% for inflation so it washes.

so in the end you've payed 58,648.01 of today's money for a $50,000 boat over the course of 15 years. That is an extra $8,648.01 or $720.67 per year.

Final result:

Paying 1.44% per year.

[Brad B]

I generally don't think that financing "toys" is a sound idea.

[Jimmypooh]

I generally don't think that financing "toys" is a sound idea.

Any reason why not? I understand that financing is just a way of getting something you really can't afford at the moment, but I don't see that that is a problem if you have a sound head. No one needs a big house (or a house at all) but we want it and are willing to finance it. I guess there is a gray line between what is a toy and not. Even so, as long as you know what you are doing I don't see a problem with financing a toy if that is what you enjoy.