A number of credit unions are helping their members achieve their dreams of feeling the sea breeze against their faces.
Sales of recreational boat loans have flourished since the end of the recession, giving credit unions an opportunity to provide a unique service to their members. These loans also tend to come with higher interest rates that can boost a credit union’s bottom line.
But being able to make loans on boats is partly limited by an institution’s geography and willingness to gain the expertise to properly underwrite the risk of a niche line of business.
“Rather than competing for business or commercial loans with area banks, we find it more beneficial to offer these types of loans to fill the need for individual consumers,” said Keith Wilcox, executive vice president of lending at Georgetown Kraft Credit Union in South Carolina. “By offering a variety of loan options, we are able to fit the needs of our members throughout the lives. The more loans that a member has with us, the more likely they are to rely on us for future lending needs as well.”
Opportunities to be had
Retail unit sales of new powerboats totaled about 280,000 in 2018, up 4 percent and the highest total since 2007, according to the National Marine Manufacturers Association. The trade association anticipates seeing another 3 to 4 percent increase in sales of new powerboats this year.
Since these credits are specialized, offering them will depend on an institution’s location and focus. Credit unions can originate them by directly working with the member or indirectly by partnering with a boat dealer, said Alan R. Thompson, senior managing partner at BSG Solutions Group.
Many boat dealers know the lenders who will make these loans and will contact several potential financial institutions on behalf of the buyers. This can be easier for the buyer, and it is not unusual for the lender to pay a commission to the dealer.
Offering boat loans increases member loyalty, “deepening of an existing member relationship,” said Allan Prindle, CEO of the $655 million-asset Power Financial in Pembroke, Pines, Fla.
Boats are an “integral part” of the South Florida lifestyle because of the good climate and proximity to both fresh and salt water, Prindle said. Florida is home to 7.7 percent of all registered boats in the U.S., the highest rate in the nation, according to 2017 data from the Coast Guard.
“Boating is a way of life for our membership,” Prindle said. “Our boat loan portfolio ranges from flats fishing boats costing tens of thousands to large multi-diesel motor inboard sport fishers and specialized center consoles with three or four outboard engines that can be several hundred thousand dollars.”
Boat loans also provide an opportunity to boost revenue as these credits tend to command higher interest rates to help offset risk. For instance, the $7.3 billion-asset Teachers Federal Credit Union will finance up to 90 percent of the purchase of a boat.
At the Hauppauge, N.Y.-based institution, these loans can be from $5,000 to $50,000 and last from one year to 20 years with interest rates ranging from more than 4 percent to almost 7 percent. In contrast, interest rates for auto loans are usually from about 3 percent to almost 4.5 percent.
“Wanting to own a boat is natural to Long Islanders, since they have easy access to waterways – the Long Island Sound on the north shore and the Great South Bay in the south,” said Francis Collins, senior vice president of consumer loans and credit at Teachers.
Watch out for risks
But there are risks tied to making boat loans, experts said. For one, credit unions can charge higher interest rates on these credits to “ensure an adequate risk-adjusted return for lending with a boat as collateral,” Prindle, CEO of Power Financial, said.
Moreover, acquisition costs are higher than for an auto loan. The Coast Guard requires certain documentation and a detailed survey of the boat’s condition must be reviewed as part of the loan process.
Daryl Jones, senior director with Cornerstone Advisors, said that boat loan applications have to go through a manual review process for approval, making them more time consuming. In contrast, originating an auto loan is more automated.
Additionally, to repossess and resell a boat if a loan goes bad is more challenging than a traditional auto loan. Ensuring that borrowers have proper insurance on their boats in case a hurricane or other disaster strikes is also a must.
Wilcox of Georgetown Kraft Credit Union said getting an accurate value on certain boats can be difficult.
“Due to individual add-ons, customizations and accessories, two identical make and model boats could vary differently in value,” Wilcox said. “We must also take into consideration the options, gears and electronics installed on the boats; as well as financing for motors and trailers for the boats. Finally, financing is more difficult for used boats than new boats.”
Outlook for 2019
Collins of Teachers said that a slowing economy would “definitely have a negative impact” on the number of people that will be looking to own a boat.
“However, it is too early to tell as we typically see our most activity as the spring approaches and in the fall,” he added.
Collins noted that TFCU will likely book the same volume of boat loans in 2019 as it did last year.
Prindle of Power Financial has a “positive” outlooks for boat loans this year.
“Interest rates remain historically low, fuel prices have stabilized recently and newly released boat designs are significantly encouraging the trade-up market,” he said.
But Thompson cautioned that demand for these loans will decrease significantly if the unemployment rate or gas prices go up and the economy slows.
“By and large, these are recreational products, and customers will eliminate these before their mortgages and their auto loans,” Thompson said.