Financing vs. Cash

RobGallagher · #1 (**permalink**) 01-31-2012

Finally, I found a boat I'm interested in if I can get it at the right price.

The plan was to sell some investments and pay cash. I have been advised that this is silly since the market could be approaching an upswing, interest rates are low, and the tax deduction may help me.

Before talking to lenders I was willing to pay close to 30K, now after talking lenders, I found that they all value the boat at closer to 25K and will only loan me 80% of that figure.

Is it safe to say that the bank (using their BUC subscription I ass u me) is probably pretty close to the boats real value?

Any advice for financing on a late 1980's boat? Or should I sell and pay cash?

msmith10 · #2 (**permalink**) 01-31-2012

You're asking questions that nobody can answer given the information provided. First, the value of the boat and what the bank is willing to finance are unrelated. The bank is not a boat surveyor or appraiser-- they're just trying to ensure that their loan is covered. Get a survey. Look at Yachtworld for comparable prices.
Finance or pay cash? That's a personal decision. As much as I love sailing, in my opinion a boat is a toy (I don't make a living from a boat) and I don't borrow money for toys. However, the cost of the interest may be a worthwhile expense for you if you want it that badly and it will improve your quality of life to that degree. That's a purely personal decision.

travlineasy · #3 (**permalink**) 01-31-2012

Rob,

If this is a used boat, I assume that you will have it surveyed prior to purchasing. Most surveyors will provide you with the fair market value price of the boat when surveying. They take into consideration all that needs to be fixed or updated, then provide with an appraisal of the boat.

As for cash V/S financing--I would go with cash. Cash is a powerful tool. Besides, the banks, all banks, are in the BUSINESS of making loans to folks that don't really need them. That's how they make huge sums of money. As for the economy making a big turnaround--I don't think so. Of course, every broker out there will tell you how well they can predict the world's economy. But of course, they're working with your money--not theirs.

Good Luck,

Gary

jameswilson29 · #4 (**permalink**) 01-31-2012

Cash only.

Use cash for depreciating assets; use financing for leverage on appreciating assets.

CarolynShearlock · #5 (**permalink**) 01-31-2012

One thing to think about -- if it's financed, they'll require certain types of insurance. You won't be able to just have liability. And the insurance company will put lots of restrictions on you -- where you can sail, how many on board, and where you are in hurricane season.

Not only does that restrict your choices, it can add money both for the insurance and for marina stays and/or haul outs.

When we bought our (then 25-year-old) boat, we financed it for many of the reasons you cite. And we got the insurance they required us to have, which had a number of hurricane season restrictions in it. Cruising in Mexico, we went through Hurricane Marty in 2003. No damage to us, but we knowingly violated our insurance to go to what we thought was the safest place. If we'd had damage, we would not have been covered and since we violated our loan terms the entire loan would have been due. Immediately.

After that experience and hearing what the "new" restrictions would be as well as knowing how many boats had not been paid for the damage they sustained, we paid off the loan, switched to having liability insurance only and spent the $$ we saved on improved ground tackle (although ours had held, we wanted to upgrade). From there on out, we made our own decisions without an insurance company's input.

As far as we're concerned, the required insurance is the worst part of financing a boat. Not saying that insurance is bad, just it takes away your ability to make decisions based on what you think is best.

PaulinVictoria · #6 (**permalink**) 01-31-2012

Cash is also a very big persuader for getting a good price on the boat you want. Putting a big ole pile of $50s in someone's hand is quite motivating for them

kjones · #7 (**permalink**) 01-31-2012

My 2 cents.
You need to run the numbers your self to determine if cash or financing is the right course. Consider what the term of the loan is and at what interest rate. If you believe you can make an investment with the cash you have on hand now that will yield a retun greater than the interest rate of the loan over the term of the loan then you should finance. Use cash is the invese is true. In making that calculation also be sure to consider what expected inflation is over the term of the loan. If inflation is expected to rise then your target ROI to justify financing would be lower (by the amount of expected inflation).

Also, as you mentioned consider you tax situation, if you're selling the investments you mentioned at a loss then thats another deduction.

bljones · #8 (**permalink**) 01-31-2012

^ What he said.

NCC320 · #9 (**permalink**) 01-31-2012

Quote:

Originally Posted by travlineasy

Rob,

If this is a used boat, I assume that you will have it surveyed prior to purchasing. Most surveyors will provide you with the fair market value price of the boat when surveying. They take into consideration all that needs to be fixed or updated, then provide with an appraisal of the boat.

:

While a surveyor will provide you with his opinion of the fair market value of the boat, it is just his educated opinion based on experience, inspection of the actual boat, etc. Another surveyor may come up with a different opinion...maybe close, maybe not. The opinion may be helpful to you in deciding whether the price you are planning to pay is a fair price. In my mind, the value in a surveyor will be in determining the real condition of the boat...are there hidden trouble spots?

I suspect, and you should confirm before going further, that the bank has their own guidelines, using BUC or whatever, and will not deviate from that amount to lend on the boat, regardless of the surveyor's opinion. They will however, probably require a survey in most cases to confirm that the boat is in good condition, and will require that you carry insurance on the boat.

Minnewaska · #10 (**permalink**) 01-31-2012

I also agree that there isn't enough info to answer the question. The tax impact on selling assets has to be considered. These days there are stocks paying dividends nearly as high as the note rates on some marine loans. The loan can be tax deductible, if you meet certain requirements. If you have gains in the securities, you will have to sell that much more and potentialy give up that many more dividends to free the cash for the boat. Then, of course, the stocks have both upside and downside potential. The boat is only going down.

Just food for thought above. Being conservative with debt is never a mistake, but if you have a few assets, be smart about it.

The banks determined value may or may not be conservative, but if you are going to pay more, consider their perspective. They want to be ale to sell the collateral if they have to. Will you? Those values are going to be the most likely where you will find buyers if you need to. How long did it take the seller to find you?

Finally, never borrower money for the tax deduction itself. Why spend a dollar to save 40 cents? The transaction has to be a comparison to the alternate use of cash or other debt.

Good luck.