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A Word About Loans

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Before we begin examining the merits of the different types of boat loans, allow us to say a word about loans.

First, let’s define what it means to take out a loan, or to “finance” something. When you take out a loan, a bank or other lending institution allows you to borrow their money in order to purchase something. You are charged an interest rate to borrow this money (the interest rate depends on many factors, some of which we will examine later).

For example, let’s say you want to purchase a boat for the price of $10,000. You don’t have anything to trade in, but you do have a down payment of $1,000. You must determine the length of the loan (this is the amount of time you have to pay the money back to the lender). In this case, we’ll say it’s 36 months, or three years. The interest rate you are given is 5%.

In this example, the amount of your loan is $9,000: $10,000 purchase price minus your $1,000 down payment. Your monthly payment will be $270. So, you can own your $10,000 boat today for $1,000 out of your pocket and $270 a month for the next three years.

Consider this: After you have paid off your boat in three years, you will have paid $10,720 for the boat that was originally worth $10,000, and now it’s three years old and worth far less than that.

The point is this: You must carefully decide whether it is the wisest financial move for you to take out a loan. If you were to save the $270 per month for three years in a savings account bearing 3% interest, you would have a balance of $10,177, so you could purchase your boat by paying cash and have some money left over.

Choose carefully before deciding to take out a loan to purchase a boat or any other item.

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