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Old    Chance Alex (calexan)      Join Date: Dec 2008       03-11-2014, 9:48 AM Reply   
I'll admit it.... Im dumb when it comes to financing so that why I come to you guys cause there are some experts on this board. The last two boats I've done like 3-4 year loans and tried to pay them off quickly with high payments. Both boats I only kept for two-three years before selling.

I guess my question is that if I'm only planning on keeping my next one another 2-3 years is is dumb to get a 20 year loan with a low payment. I realize I'm only going to be paying mainly interest just didnt know if they length of the loan would substantially affect the payoff amount in two years. I guess what I dont understand is how they calculate what the payoff amount is. Do I pay the expected interest the company would have received over the 20 year span or just they remaining principle at the time of sale.

Like how would they payoff amount of a 10 year compare to a 20 year other than however much principal I reduced in the two years.

Let me know if this made absolutely no sense and Ill try my best to explain my question better.

Cliffnotes - Financing a boat, trying to determine the difference between payoff amounts between loan lengths if I only plan to keep the boat a couple years.
Old    Ben R (brichter14)      Join Date: Jul 2010       03-11-2014, 9:55 AM Reply   
Www.mlcalc.com

Click loan tab. Fill in the blanks. It will answer it for you.


I would say dont do it.
Old    Mark (FunkyBunch)      Join Date: Jun 2011       03-11-2014, 9:59 AM Reply   
I can not speak for every loan product, but in most if not all cases if you take a 20 year loan your payments to start with will be mostly interest. That said if you make principle payments over that amount or pay it off early you only paying for the principal of the loan not the interest.
Example
payment on 20 yr note $550
$475 = interest
$75=principal
As long as you are making a principal payment over and above the regular payment it will come directly off the principal. You have to be careful because if you just submit a payment for $1000 they will just credit you toward next months payment so you will be paying interest on the additional payments.
Old    RB (boardman74)      Join Date: Jul 2012       03-11-2014, 10:03 AM Reply   
Its gonna effect it HUGE. With a short term loan you aren't paying much interest and most of your payment goes towards principal. With a long term loan there is a ton more interest and the bulk is paid in the beginning. Chances are you will be upside down after 2-3 years on a long term loan with the situation you described.

For example on a 50K loan for 15 years with a good rate the payment is around $375. So a total of $4500 yearly. Right around $1000 is all that goes to principle. So $3500 in interest. The second year it might be $1200 to principal and $3300 to interest. So you see after 2-3 years you haven't even touched the depreciation. 20 year loan is even more interest/ less principal in the beginning.
Old    Ben R (brichter14)      Join Date: Jul 2010       03-11-2014, 10:06 AM Reply   
Factor it like this

What you paid - 3 years of principal payments > depreciatied value of the boat + interest paid.


80,000 boat at 5%

After 3 years thats 7541 paid in principal.

72459 left on the loan.

If the boat depreciated at 20% value it is now worth 64000

After 3 years you would have paid 11461 in interest.

So say you sold the boat for 64000.

You would have to pay 8459 to get out from the loan.

So you "rented " that boat for three years costing you a total of 27461.

Or 762$ a month for three years time.
Old    Onthe Creek (onthecreek)      Join Date: Apr 2013       03-11-2014, 10:08 AM Reply   
the payoff amount is whatever you owe plus interest accrued until whatever the payoff date is. so, yes...paying less for 2-3 years means a higher payoff balance than if your payments were higher.

the real question though is what is the value of the boat after 2 years. if your small payments don't at least pay depreciation (the value the boat loses in 2-3 years) then you could sell and still owe money.
Old     (Supra24)      Join Date: Sep 2013       03-11-2014, 10:14 AM Reply   
Payoff would only be of the principal portion. MOST loans do not accrue all interest up front. You will pay more interest on a 20 year note opposed to a 10 (since you are reducing principle slower) but not 10 extra years worth.

Assuming payoff in 5 years, 5% interest, 100k note, making minimum payments, 10 vs 20 year .... the payoff would be a difference of over 25k. There is about 3k in extra interest cost on the 20 year note over the 10, if paid off in 5 years.

Loan payoff on a 20 year note would be over 80k. Loan payoff on a 10 year note would be 55k'ish.

You will probably want to use that calculator above to check my math. I ran through it quick ... nevermind you got a ton of other responses

Last edited by Supra24; 03-11-2014 at 10:15 AM. Reason: other responses
Old     (ashjbrown)      Join Date: Jul 2012       03-11-2014, 10:37 AM Reply   
it should have very little effect except a lower payment. A boat loan usually works like a car loan not a mortgage where you pay all the interest up front. The only difference could be the interest rate. I would ask your banker at where you plan on financing the boat and let them advise you.
Old    Ryan K (FastR3DN3K)      Join Date: Jun 2013       03-11-2014, 10:47 AM Reply   
Basically what all these responses are trying to say is get a note that you can comfortably afford as short as possible, or as close to the length of time that you plan on keeping the boat.

It does you no good to get a long term loan for the convenience of lower payments if you plan on keeping the boat for a short term period. You'll be upside down when you go to sell and lose even more money on the deal besides the interest. On a long term note, the percentage of your payment that goes towards interest will always be higher than the percentage that goes towards principal until a little after the halfway point of the term length.

Using the calculator posted above, on a $70,000 boat:

12 years financing @ 7% (pretty normal average in boat financing these days), you'd pay $720/month and a total of $103,660 if you kept it for the whole 12 years. In 3 years if you decided to sell, you will have a payoff around $57,000.

6 years financing @ 7% you'd only pay $1200/month and $85,927 for the full term. In 3 years if you decided to sell, your payoff would only be around $37,000.

You'd be saving not only close to $20,000 in interest in the long run, but also years of additional payments that could go towards other toys/upgrades if you decided to go with shorter terms. And if you decided that you didn't want to keep the boat long term, you'd be in a better off position to sell because the principal pay-off would be drastically lower, meaning that you'd have more money back in your pocket for a down payment on your next boat.

Again, don't finance long term unless you plan on keeping it long term
Old    Chance Alex (calexan)      Join Date: Dec 2008       03-11-2014, 11:07 AM Reply   
Thanks for all the help so far guys. Im going to play with that Calculator for a bit.

Let me throw in another factor..... What if you didnt have to worry about depreciation? Say I'm getting a good deal from a friend who has to sell his boat. Just making these numbers up in my head but here goes....

Purchase Price of $75000 with 25000 down. Loan for 50 at 5%, but in two years the boat is still worth $85000. Im not trying to make any money just not get slaughtered when I sell it. Still dumb to take a 20 Year loan at 5% vs a 10 year for the lower payments? Without having to factor for depreciation I still have some money I can lose right before im back to square one right? I know im basically only paying interest but figure thats what im doing with a 10 year also just reducing the principal a little bit faster.
Old    Chance Alex (calexan)      Join Date: Dec 2008       03-11-2014, 11:11 AM Reply   
Basically I'm looking at it as using the potential profit I could make on selling to use the boat until I have to sell it to break even with the deal? Does that make sense? I know boat values fluctuate, but I'm confident that it would take a couple of years before the boat is worth its current purchase price.
Old    Ryan K (FastR3DN3K)      Join Date: Jun 2013       03-11-2014, 11:20 AM Reply   
Look at that calculator page and scroll down to the chart and monthly/yearly breakdown of payments/principal paid/interest paid/remaining balance columns. Those are the numbers you should be looking at honestly. Play with the financing amounts and terms until you get those numbers where you want them (but don't be too conservative with the interest rate, a lot of people factor a lower interest rate and then get disappointed when they don't get approved for it). Once you find a payment schedule that you're happy with that isn't going to cause you to lose your ass, you'll have a better idea of what payments you want and what kinda of budget you should stay in.

For me I'm in my boat for the long term, guessing 8-10 years. I had the option to finance out to 20 years with my bank or 15 with the dealer. I chose to go with the dealer, but shorten my terms down to 12 because I liked the idea of 3 less years of payments despite pushing my monthly payment up. I figure when I go to sell in 8-10 years, I'll be paid down enough that I won't be upside down or take any sort of loss other than the interest payments.
Old    Chance Alex (calexan)      Join Date: Dec 2008       03-11-2014, 11:52 AM Reply   
So basically looking at the calculator... If I can take the Amount Owed after Year 1 or Year 2.... Add that with the Amount of Interest Paid respectively with that year and add my down payment # of 25k and sell the boat for that #, Then have I basically just spent/blown the principal paid #? I'm awful at math.
Old    RB (boardman74)      Join Date: Jul 2012       03-11-2014, 12:07 PM Reply   
I'm not sure what 75K boat isn't going to depreciate over the next 2 years. I buy my boat at basically cost plus freight with no tax. That deal is eaten up the first half season alone(take delivery in spring and sell late summer). I break even in August. If I waited till the following spring I would lose a little. I'm talking strictly purchase to sales price. No even factoring in payments I made. Thats at dealer cost. A new boat will probably depreciate 40% from MSRP in the first 3 years. There isn't a deal out there good enough to have zero depreciation in the first 2-3 years.

If your looking for something you can use and break even after a few years you need to get into the older boats that have stopped depreciating due tot he rising cost of new boats. Also remember depreciation is a pretty even percentage across the boats. So the more expensive the boat the bigger depreciation hit in Dollars. A 50K boat may lose 10K the first year where a 100K boat will lose 20K.

Last edited by boardman74; 03-11-2014 at 12:10 PM.
Old    Ryan K (FastR3DN3K)      Join Date: Jun 2013       03-11-2014, 12:33 PM Reply   
Sorta, remaining balance (at whatever year you plan on selling) + interest paid + original down payment = your break even when you sell. So let's say for examply you put $20,000 down, your remaining payoff is $30,000, and you've spent $5,000 in interest, then break even in the boat is $55,000. If you can sell the boat for more than that at the the same point that your calculating for, then it's a good investment. If it's less, then it's not as good of an idea. But most people also don't like to factor in the interest as that is basically a "cost of doing business", just like fuel in the boat, oil changes, and general maintenance. You gotta pay to play

The goal is to figure out a payment schedule that:
1. You're comfortable with the monthly note and can pay without breaking the bank
2. Is paying as little interest as possible (rate)
3. Pays down the principal faster than the boat depreciates

This is where a lot of people screw up by financing for too long to get the low payments, but then when they go to sell in a couple years they're $20,000 upside down on their value. They basically have to pay someone to buy the boat from them because of the negative equity, and this is not the position you want to be in. This is also why so many people these days are so deep into debt and have trouble getting out of it.

You've been doing it right on your last 2 boats by paying them off as quickly as possible because that reduces the amount of money wasted in interest going to the bank, and keeps the principal balance lower than the resale value of the boat. I'm not saying you can go a bit longer in your financing terms, but would advise against going for 10+ years if you're planning on upgrading ever 3-5 years.

My rule of thumb for short-term buying is never finance for more than about double what you plan on keeping it, up to a max of about 8-10 years. If you're planning on selling in 3 years, finance it for 6 years or less. Based on your info and my finance model, if you bought a $75,000 boat, put $25,000 down, and financed it for 6 years, your payment would be about $850/month. But in 3 years you'd only owe about $27,000 for the payoff, and only payed about $8,000 in interest. So using the math from earlier: $27,000 pay off + $8,000 interest + $25,000 down payment = $60,000 break even.

Now let's say your $75,000 boat has depreciated 30% and stabilized in value at around $52,500. You sell your boat for this amount and the only thing you've really "lost" is the money on interest ($60K-$52.5K). You use the proceeds of the sale to payoff your loan and you're left with $25,500 (your original down payment plus a little extra), which you can now use towards the down payment of your next boat. You've just had 3 years of fun on a pretty nice boat for basically the cost of interest and expenses, which seems like a pretty decent finance model to me.

This is why I say finance for as short of a term as possible.

Last edited by FastR3DN3K; 03-11-2014 at 12:39 PM.

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