How much boat can I afford? 3 steps to calculate your budget

Boat prices vary depending on the model, make, size, features and condition. For instance, an 18- to 25-foot used pontoon can cost between $8,000 and $12,000. On the other hand, a similar-sized used cuddy cabin can cost between $20,000 and $30,000.

Taking out a boat loan can lessen the initial financial impact of this purchase, allowing you to split the amount into more digestible monthly installments. But just because you get approved for a $40,000 loan doesn’t mean that should be the price range you should aim for.

The costs of boat ownership go beyond purchasing the vessel. You’ll need to factor in maintenance costs, insurance, registration fees and taxes, among other expenses, to know your actual budget.

How to figure out your budget when buying a boat

You can find used boats for less than $10,000. On average, new ones cost upwards of $40,000. Though buying your boat with cash may be possible, saving for it can be a tall order. That’s why many owners opt to take out a boat loan to finance their purchase. But even if you don’t have to pay the whole amount up front, you still need to figure out your budget before shopping to avoid unpleasant surprises.

Step 1: Check your credit score

Just like with any other loan, your credit score plays a key role when getting a boat loan. It will determine your approval and the terms and interest the lender will give you. That’s because your credit score indicates how risky of a borrower you are, so the higher it is, the better.

Typically, you’ll need a FICO credit score of 670 or better to qualify for a boat loan with favorable terms. Though some lenders may accept a credit score below that threshold, you’ll pay more on interest rates and fees, which can also result in a higher monthly payment. Borrowers with excellent credit are more likely to get loans with low interest rates and fees.

If you aren’t sure of where your credit stands, request a copy of your credit report before you go shopping. Knowing your score will also help you narrow your options to lenders offering loans to borrowers within your credit profile. This will save you time plus reduce your chances of getting denied.

Some banks and financial apps allow you to view your score for free as part of their member benefits. If none of the institutions you’re affiliated with offers this benefit, a free annual copy of your credit report from all three bureaus by visiting AnnualCreditReport.com. Though these copies won’t include your actual score, they will give you an idea of whether it’s a good time to apply for a loan or if you should improve your credit first.

Step 2: Calculate your debt-to-income ratio

Your debt-to-income ratio — or DTI — is a figure that lenders use to measure how likely you are to default on a loan based on how much debt you have relative to your income. This figure is expressed as a percentage and is the most important factor for approval.

Lenders typically prefer a DTI of 36 percent and under. Though some lenders may accept higher thresholds, anything above 43 percent is usually considered too risky for lending.

To calculate your DTI, add up all of your monthly debt payments and divide that number by your monthly gross income. Alternatively, you can use Bankrate’s DTI calculator to help you crunch the numbers. If your DTI is on the higher side, consider paying off debt. This is the quickest way to lower this figure and boost your chances of approval.

Step 3: Figure out your monthly payment

If your credit score and DTI make the cut, the next step is figuring out how much you can borrow. You can do this by using a boat loan calculator or getting prequalified with multiple lenders.

With a boat loan calculator, you can tinker with the loan amount, interest rate and length of the repayment term to get an estimated monthly payment. Based on this last figure, you will know whether those terms would work within your budget or if further adjustments need to be made.

Prequalifying with multiple lenders, however, is the best way to get a firm grasp of your budget. That’s because you’ll be able to compare actual offers side-by-side without impacting your credit. It’s also worth noting that you may prequalify for a higher amount than expected. Although this can be a good thing, it can also make it easier for you to get carried away and bite off more than you can chew.

If you’re wondering what a good rule of thumb is for a boat payment, it will depend on your DTI. If your DTI is on the higher side, your payment shouldn’t exceed 5 percent of your monthly gross income. But if you have a lower DTI, then a good rule of thumb is not to go over 10 percent. That means if you have a monthly gross income of $5,000, your payment shouldn’t exceed $500 a month — or $250 if you have a high DTI.

Other considerations

Buying a boat is similar to getting a car, an RV or another vehicle. You’ll have to factor in yearly maintenance costs and insurance as part of the equation — not just your monthly payment.

According to Bankrate, you can expect to spend about 10 percent of the cost of the boat in maintenance alone. So, if you have a $35,000 boat, that translates to $3,500 a year or more just to keep it running. Then, there’s insurance costs. Boat insurance rates typically equal 1.5 percent of the boat’s insured value, though this figure can fluctuate greatly depending on the company and your location.

Other expenses to keep in mind when calculating your budget include:

• Fuel.
• Taxes.
• Dock fees.
• Storage fees.
• Safety equipment.
• Registration fees.
• Certification fees.

The bottom line

Knowing your budget before shopping for a boat could spare you a lot of financial headaches in the future. To come up with a price range, make sure to assess your credit and financial situation, in addition to researching estimated ownership costs. This will help you determine whether this is something that actually fits within your current budget or if you need to make some adjustments before buying.