When an old boat gets traded in for a new one, the only things left behind with the old owner should be happy memories, not an unpaid bank loan.

Sad to say, the excitement of trading in Old Faithful for Bigger and Faster can overshadow important details, like verifying that the trade-in’s loan has been satisfied, says Charm Addington, vice president of BoatU.S. Finance and Documentation.

“Usually, people are so caught up in the new boat that they assume everything’s been taken care of with the old one,” she says. “There’s a lot of trusting going on,” she said, when boat owners include a trade-in when purchasing another boat.

Addington says people who trade in boats assume that the dealer will pay off their boat loan, but that sometimes doesn’t happen. Their first inkling that something is amiss comes in the form of a late payment notice from the lender or inability to obtain financing because of bad credit.

Even though an owner relinquishes possession of the boat and uses its value as part of the basis of a bargain to purchase another, this doesn’t eliminate the owner’s obligation for the old loan.

To avoid problems, Addington recommends writing into the purchase agreement a statement specifying that the dealer is responsible for paying off the loan on the trade-in by a specific date, usually no more than two weeks after the deal is consummated. Even so, the owner should go one step farther and verify with the lender that the loan has been paid off in full. This can take a minimum of seven to 10 days for verbal confirmation, but could take as long as a month for a written lien release.

“Many times, the consumer will just sign a power of attorney” enabling the dealer to sell the trade-in, Addington explains. This means that the owner gives the unsigned title, or the boat’s registration papers in nontitling states, to the dealer, who is thus given the authority to act for the owner when the trade-in boat is sold.

Dealers obtain financing, also called “floor planning,” for the boats they have in inventory. In the case of a trade-in, floor planning gives the dealer the funds to pay off the loan.

In the past year, many major manufacturers have experienced substantial drops in new boat sales figures. The reverse of the proverbial high tide that floats all boats can also be a severe low tide that pulls dealers down with it.

Addington says the slowdown in boat sales has her worried. Tough economic conditions could make it tempting for some cash-strapped dealers to wait as long as possible before satisfying loans on trade-ins.

Consumers trading in boats need to understand that giving a dealer power of attorney to sell a boat does not absolve them of the loan obligation. While anyone can make payments on a loan, regardless of whether they’re the borrower, at the end of the day, the person whose name appears on the loan agreement is liable for the loan and this is the person the bank will look for when payments don’t come.

A few years ago, the Broward County, FL, Consumer Affairs Division informed BoatU.S. of an ongoing investigation involving a Dania boat dealer who failed to satisfy loans on at least five different trade-ins. Pressure from the county agency convinced the dealer to finally pay off the loans, in some cases nearly a year late. Meanwhile, owners of the traded-in boats said that the dealer’s actions dam aged their credit.

A dealer’s failure to satisfy a loan can also have repercussions for buyers of used boats.

For example, a Texas boat owner reported to BoatU.S. that months after he purchased a boat from a Lewisville, TX, dealer, he still had not received the title and consequently could not register or use the boat. He found out later that the dealer had not paid off the boat’s original owner and the lender wouldn’t release the title to the second owner.

State laws prohibit the sale of goods that are encumbered by liens or security interests, but this doesn’t necessarily make it easy for the consumer. In the Texas case, the dealer pleaded guilty to charges of theft and fraud, but both boat owners, the buyer and the seller, were forced to sue the dealer in civil court to recover their damages.

Boat purchases between private parties present a slightly different set of challenges, according to Addington.

Titling is required in 35 states and the District of Columbia, but only 18 of those jurisdictions require either that the creditor be noted on the title or that the creditor’s security interest be filed with the boat titling agency. In the case of federally documented boats, lien information recorded with the U.S. Coast Guard documentation office may not show up in state records.

Addington said that when a buyer can’t obtain a vessel’s title, it could be a sign that the loan hasn’t been paid off. In the case of a lost title, the original owner can easily apply for a duplicate. Most states charge a small fee for this service. In any case, buyers should not proceed with purchases until title or registration questions are cleared up.

In states that do not require titles — 16 do not — Addington recommends including in the written sales agreement a statement that the boat is sold “free and clear of all liens and encumbrances.” Both parties, of course, must sign the agreement and it should be notarized, she advises.

Because it may be difficult and time consuming for the average buyer to track down liens against a vessel, Addington recommends using a settlement service like the one offered by BoatU.S., which can help with purchase agreements, lien searches, loan payoffs and transfer of ownership. BoatU.S. can even act as agent and coordinate all transactions between buyer and seller. Visit BoatUS.com/boatloans/service or call 706-869-8241 for more information about the BoatU.S. Settlement Service.

BOAT BUYING TIPS:

• Know how much you can afford. Prequalify for financing before you shop. Check up on the dealer. Go to the BoatU.S. Consumer Protection Bureau’s consumer protection database online at my.BoatUS.com/consumer/database.aspx or call 703-461-2856. The Better Business Bureau (bbb.org) also has an online database of complaints.

• Research your current boat’s value before negotiating the trade-in value. Try to keep negotiations for the trade-in value separate from the negotiations for the new boat. The free BoatU.S. Value Check service (703-823-9550 ext. 3990 or BoatUS.com/buyer/valueform.asp) can give fair-market values for used boats, which may be useful when making a trade. Be aware, however, that trade-in values are considerably less than market value.

• If there’s a loan on your trade-in, make sure the purchase agreement includes a written provision that the dealer will pay off the loan within no more than 30 days.

• Write in contingencies that the boat being purchased will undergo a satisfactory survey and sea trial. This is essential for all used boat purchases but is also advisable when buying an expensive new vessel or when the buyer is inexperienced.

• Contracts should state clearly that the vessel is being sold free and clear of all liens and encumbrances.

• At the time of purchase, buyers of new boats should receive a manufacturer’s certificate of origin or a builder’s certificate, stating that the vessel has no prior retail owners. Contact the boat manufacturer if you do not receive this document.

• New and used boats are sold with temporary dealer registration numbers that bridge the gap between purchase and registration by the new owner. In some cases, the dealer takes care of registration. If this process takes more than 30 days to complete, contact the state boat registration agency.

• Consumers who have traded in vessels should verify with the lender that any loans have been paid off. Payoffs should be completed within a few weeks after the deal is completed.

• Use an independent service, like the BoatU.S. Settlement Service (706-869-8241), to obtain information about liens or title abstracts or for complete assistance with all aspects of a purchase or sale.

(c) Copyright BoatU.S. Magazine, January 2008