Finance: The right fit
Overview of aircraft loan structures
A fully amortized, fixed-rate loan with the longest possible term might be ideal for someone who will own the airplane for a decade or more. The interest rate locked in at the beginning of the term might be higher than the going rate at the end, but the tradeoff is peace of mind knowing the guaranteed monthly note is compatible with a long-term spending plan. For noncommercial use, some lenders will execute fully amortizing, fixed-rate loans with 15- or 20-year terms for turboprops still in production.
Many clients say they expect to own their aircraft about 10 years. Data AOPA Finance has collected shows typical length of ownership is actually no more than five. That’s why floating, balloon, or adjustable rate (ARM) loan structuring might make more sense. A floating rate loan has no fixed interest rate, while an ARM loan starts out fixed but then changes (to either a new fixed rate or a floating rate). Following the initial period, typically five years, an ARM floats based on benchmark reference rates such as those from the Federal Home Loan Banks. Another term for an ARM is hybrid. In the current interest-rate environment, these financing packages can offer better savings compared to fixed rates with similar amortizations.
Balloons are another option; however, the amortization period is longer than the loan term. An example might be financing a turboprop on a five-year term with a balloon and a 15- to 20-year amortization. That package might work best for members who are looking purely for the lowest rate, and know they’re going to own the aircraft (and/or keep the loan) less time than the average.
Balloons allow the borrower to delay paying the principal until the very end, keeping the monthly outlay low. At the end of the term, that small monthly note balloons into one large final payment.
Sometimes members come to us comfortable with the structures of floating or ARM financing, but the complexity of their finances prohibits them from using those options. Take, for example, a real estate entrepreneur who owns 30 properties, each a separate ownership entity. He or she has partners on some of these properties and are a majority owner, half owner, or some percentage across the real estate portfolio. Despite the positive cash flow, some lenders will not do a deal without a guarantee on all the entities the owner has equity in, as well as a personal guarantee. Financial complexity surrounding the business might mandate a simpler, asset-based loan configuration.
Asset-based deals can be further simplified if the client can increase the down payment. Whereas a newer airplane might be approved with a 15-percent-down, 20-year amortization, the same situation for an older turboprop might go from “no deal” to “deal” with 30 percent or 40 percent down. Likewise, a relatively mainstream turboprop that has been produced in significant numbers might normally see a 15-year amortization. Without a larger down payment, older or rarer turboprops might cause lenders to shorten the amortization period, or even refuse to make the loan.
Jet financing has its own requirements, which also might necessitate a higher down payment. That’s why asking the right questions of our members allows AOPA Finance to give them the best picture when it comes to securing the best financing package for their unique situation.
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