Interest Rate on Loan - Paid Off Boat

[tnvolgrad]

There is a lot of discussion on folks that own their boats outright versus financing them.

My question is - assuming you have the cash to pay off a new boat; why would you tie up cash on a depreciating asset? Rates on 5-10 year loans are <5% if you shop around and you can earn 7% with a modest investment strategy. In other words if you tie up lets say $50K on new/used boat (easy number for math purposes), that boat does nothing but depreciate over the useful life. If you borrow the money and invest the cash you would of otherwise paid the boat off with you can service the debt (5%) and also gain a premium (lets say 2% - that's my 7% number on a modest investment strategy.) If you value that strategy over 5 years you make $7K of interest income. Granted you have a monthly operating expense, but you have effectively paid for 14% of the boat by using your money to work for you.

Assume you earn 10% (5% premium over your cost of borrowing) on your investment strategy - over the course of the same 5 years you would have earned $17K or effectively paid 34% of your boat off by making your money work for you. That's the beauty of compound interest. You could run this scenario a number of ways and over different horizons - the math all says the same thing when you have a cheap borrowing base.

[Nobody]

The ole "its better to borrow" pitch. This was pre-recession economics.

[sooner25]

Liquidity. I'd rather have the cash than it all be tied up in a boat, imo.

[tnvolgrad]

At the end of the day there is no risk because you have your cash. You can always pay the loan off if the world turns upside down, but you can't recover opportunity costs.

[robert theisen]

IF you take out a mortgage or equity line you can deduct the interest and get a better rate.I have averaged more like 15 to 20% on my investments.

[Jloflin420]

Nothing like being able to say "PAID FOR" and spending money on other toys Then again I don't float a new RZ2 or anything Im floating on a 99

[tnvolgrad]

If you are making 15-20% ROI - even more reason to borrow the money, accumulate all the cash you can from low cost borrowing sources such as an equity line, and leverage the spread ( e.g. 4-5% equity line versus 15-20% return on your investments - far offsets the deductible interest benefit).

[joaquin12345]

well in a perfect world who wouldnt want to have there money work for them and make 5-10% interest and use that to pay for enjoying their boat, as well as write off interest off of equity loan put toward a boat. However that is why there are loans and people like me have to go out and get one. So do I do the smart thing and save my $805 a month for 6yrs and go out and pay cash for my $61000 and in the mean time wait from the time im 27-32 to purchase my boat because i want to pay cash for and in the mean time i wait and do nothing but work so i can do this, or do i go out get my loan at 9.9% because that was the best deal i could get then get on here and see what others pay and go out once again redo my loan and hopefully get lower rate, and meanwhile enjoy my time as a 27yr old make memories, with friends and family. In the end i know i wont regret this purchase even though i am having to make a monthly payment. Yes i would love to have a boat paid off and anybody would be crazy to think this wouldnt be the best outcome, but in the real world I cannot do that and neither can many other people so in the end yes we get a loan. Now dont get me wrong, my home, vehicles, bills, everything is being paid for in a timely manner. I wouldnt be out making this purchase if i couldnt afford all the other necessities in life because i am young and wanna have fun but at this point yes having an $800 a month boat payment sux but worth it.

[robert theisen]

joaquin,you have read something into what was said.All that was said in this thread and other one is what were best scenarios.When i was your age i didn't even own a boat,but i wish i had.My first BIG venture was when i went into business 24 years ago.everyone told me i was crazy but i got a killer 14.9% interest rate on my business loan.All has worked out for me.So please go and enjoy your life and don't worry what others say.Remember life is not a practice run,do everything you can to enjoy it while you can.Memories are all you can keep.ENJOY YOUR BOAT.

[Timmy!]

I don't know which makes more sense on paper but it sure felt good when I plunked down $18k in cash for my first boat and didn't have a payment to make when the snow was coming down. Now, I have to fork out x amount of $ every month and wishing I didn't have that liability. I forget all about the monthly cost when I am riding behind it though!

[terjolan]

I've been on both sides of this and I have to agree that it feels good to not have a note and just own the boat straight out, however tnvolgrad is right from a position of pure economics. That being said, if your investments don't come out with a higher return than the interest rate you are paying for the loan then you are losing money. If you let your money work for you, the compound interest will feel even better in ten years than the lack of a boat note now.
Another idea is to borrow from one of your own accounts and then pay that back with the same interest rate you would have paid someone else (i.e. a retirement account you weren't going to tap until later).
Any which, it feels really good to have a boat and just spend a day at the lake with friends and family regardless of how you managed to get there!

[Ewok]

If you have complete job security and you can make the payments then by the numbers it makes sense to let your money work for you. But if you loose your job or your mortgage goes up and you can't afford the payments, chances are your going to need your investment money to cover bills and you'll probably end up selling the boat either way.

Well, I was just thinking out loud, I guess it comes down to comfort level with your job security and investment knowledge. If you are not comfortable investing and need to hire a professional to help you might not make an overall profit when all fees are paid. If you are investment savy and have cash on hand (and you probably do if you are investment savy), then you are probably already doing this strategy.

I personally took out a loan for my boat, I put 30% down, I have no other vehicle payments, I had an opportunity to upgrade my boat and got a very fair deal on the boat I bought. I have a very stable job and plan to have the boat paid off in 2 years. I am still maxing out my retirement investments and college investments for my kids. I could have waited and saved up and paid cash for the boat in a few years but I decided family memories were more important, and I view the boat payment as an investment in my families future happiness, not a financial investment. My last boat was my families old boat and we had it for 17 years. We had 2 other boats before that, a 1968 Savage American and a 1988 Bayliner. I'm in this boat for the long haul.

[Nobody]

Hell...my child support payment could by me a brand new Malibu.

[robert theisen]

Hell...my child support payment could by me a brand new Malibu.

My boat is one of my children,the other is my motorhome.LOL

[jwanck11]

I could have used cash. I used instead a 401K loan.

I took the loan just before the crash (when the signs were all there.) I paid myself 4% interest every payment and the money was used to buy back investments (funds) at cheap prices. When the market accelerated, I paid the remining balance to buy the balance of funds back allowing them to appreciate faster than the 4%+increasing return would yield.

A great set of decisions that were hedged on luck (guessing the market.)

Yes, it is better economically to maximize the value of your money, but I can also see there is a lot of utility (U) in having a paid note. For some, the value of (U) related to "satisfaction of no payment" is much higher than others and outstrips the potential returns from alternate investments and potential returns.