You’re trying to buy a new boat or RV and the loan terms come back with a little higher rate than you are accustomed to. The last time you had a similar rate, you were buying your first car with almost no prior credit history and a small down payment. You might be asking, as many others do…
We receive a version of this question almost every day. The reason recreational loan rates are a little higher compared to automotive and mortgage lending comes down to the issue of predicting risk. Banks judge risk based on a few factors, including WHO is financing and WHAT is being financed. There are many other aspects banks consider, but let’s dive into both of these questions a little deeper below.
We know that you, as the reader, probably have an excellent credit score and pay all of your bills on time. Unfortunately, that is not the case for all Americans. In many instances, people may fall on hard times and can’t afford to make the payments on their loans. We all witnessed the impact of the crash of 2008 and, more recently, the pandemic on the economy. You can be carrying along fine, making every payment on time and then you can experience a few hard months that change everything.
“Why is the rate for my recreational loan higher than it was for my home or my car? I had a similar credit score when I received those loans, so why can’t I get the same rate?”
Banks are masters at predicting the likelihood that a person will pay back a loan on time and in full. Let’s face it; if they were not good at predicting this, they would not be able to make any money on your interest payments, and the bank would not be able to continue operating. The interest rate that the bank charges fluctuates based on the likelihood that you will pay your loan back. The more risk the bank allows, the higher the interest rate. These higher rates increase the amount of money the lender receives for a loan and offset the other loans that might not pay back on time and in full.
So, where do recreational loans come into play in all of this?
When borrowers fall on unforeseen difficult times, they will typically focus on paying for the items they absolutely need first.
For example, food, water, shelter, transportation, etc. A home and car are considered more essential than a boat or RV (even if your vessel is your baby). And, it makes sense. You need to keep your mortgage current to continue living in your home, and almost everyone needs a vehicle to go to work, buy groceries, and pick up the kids from school.
Even though we would love to incorporate our boat or RV into every aspect of our lives and get out on the water or hit the open road every day, it is likely that the toy sitting down at the dock or on its trailer would have to come second to keeping the mortgage or automotive loan current. This makes financing a boat a higher risk for the bank than a car or home. When lenders see a possible higher risk, they want to know that they are protected. Unfortunately, this “protection” is obtained by charging a higher interest rate. Higher risk = higher rate.
The other reason banks charge higher interest rates for boat loans, specifically, is because the default process is much more complicated than with an automotive or mortgage loan. In the unlikely event that a lender must repossess a vessel, they must first find the vessel, motor, and trailer location, which are not the same place in many instances. Afterwards, they must consult a captain or other certified professional to move the vessel to a site where it can then be resold. Compare this to an automotive default where a repossession is as simple as moving a car; or a home default where there is no ambiguity to the location at all. You can start to see how higher rates must offset this extra risk.
We could dive into more intricacies of this topic, but you really do not need to worry. We here at First Approval Source see this every day and know how to combat higher payments and obtain the best loan package for your dream. Whether it is increasing the down payment, working with multiple lenders, adjusting the term or finding the perfect tier for a bank program, there are many ways to make sure you still end up out on the water or on the road having fun!
You aren’t alone in dealing with seemingly higher rates for boat and RV loans. So as you are shopping, ease your mind a little. Working with a financial provider who specializes in recreational lending is perhaps one of the best ways to ensure that you find the perfect loan package! For more tips on your next loan, click here! Feel free to give us a call with any questions you have throughout your buying and borrowing process, or visit www.firstapprovalsource.com!