Finance: Aircraft payment methods

AOPA Aviation Finance recently negotiated a great aircraft loan with an extremely competitive financing structure for a client. The client ultimately rejected the loan in favor of using a nontraditional margin loan to pay for his aircraft. A margin loan is designed to allow a stock investor to borrow money to invest in more stocks, using one’s shares as security. Using a margin loan can help increase one’s returns. It also can magnify one’s losses, especially if using it to pay for an airplane.

Say a sudden market correction triggers a margin call, when the investor’s equity, as a percentage of the total market value of securities, falls below a certain percentage requirement. Having to make good on a margin call could force an owner to sell the airplane. Odds are also good that if the stock market falls, so too does the used aircraft market. Losses are magnified.

Another client wanted to use her HELOC to pay cash for an airplane. The line of credit had already been approved, just waiting to be tapped. The traditional aircraft financing process was taking longer than she wanted to endure.

Over five years—the average length of airplane ownership—a major home repair is likely. Exhausting the HELOC as a long-term aircraft loan could leave her with zero equity to cover such emergencies. She would then be forced to borrow against the airplane, or even sell it.

A margin loan or a HELOC used as a stop-gap, bridge loan for a short period of time—think three to six months—might be prudent only until a post-purchase, reimbursement loan is negotiated.

Nontraditional financing options are akin to the more traditional method of paying cash for an airplane. About half of all airplane owners will pay cash. Many of them do so with the intention of getting a post-sale, reimbursement loan. While cash and nontraditional financing might increase the speed of the airplane transaction, they also might increase its complexity.

Lenders will stipulate certain actions occur prior to a nontraditional aircraft sale before they will even consider financing it—stipulations such as a cash sale be conducted through a third-party escrow company like AOPA Finance partner Aero-Space Reports. The third-party escrow company can help verify the identity of the buyer, as well as assist in the title search. Most lenders will stipulate an aircraft have a clean title, or they won’t consider financing it.

AOPA Finance, or the lender, can also offer counsel on the potential pitfalls of buying an “orphan” or obsolete aircraft. Number of units manufactured, parts availability, and current service availability matter. For example, finding financing for a Beechcraft Duke will typically be harder than for a Beechcraft Baron.

Traditional aircraft financing often is the best choice for prospective buyers. AOPA Finance or the lender will give a reasonable expectation of loan amount and terms, tailored to your situation. We know how you pay for an aircraft affects what the aircraft will ultimately cost you.

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