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Finance: Monthly payments

Exploring four important loan variables

Four important factors influence the monthly payment on an aircraft loan: the down payment, amortization period, interest rate, and loan to value ratio (LTV).

Down payment. The bigger it is, the smaller will be your monthly obligation.

Amortization period. The time over which the loan is paid back in installments. On a $1 million loan, extending the amortization from 15 to 20 years would save nearly $16,000 in payments during the first year. However, your loan balance at the end of the year is approximately $16,000 higher.

Interest rate. For comparison, using the same loan parameters, if the interest rate dropped 20 percent, from 5 to 4 percent, you would only save about $6,000 in payments during the first year. However, reducing one’s interest rate by 20 percent results in interest savings of almost $10,000 in the first year.

LTV. The ratio of the loan as a percentage of the total appraised value calculates one’s down payment. However, LTV also determines what the amortization is, as well as what other options might be available. With a strong enough LTV, an aircraft owner can have essentially infinite amortization in the form of an “interest-only” loan with a balloon payment due at the end.

Why choose the interest-only option? Historically the most common reason is to maximize a tax benefit, where there’s a known business use for the aircraft. Writing off the depreciation of the aircraft and the interest expense allows the owner to enjoy a low monthly payment, business expense deduction on the aircraft, and potential tax deduction on the interest. However, in volatile stock market conditions (as currently exist), another good reason for interest-only loans, especially on owner-flown aircraft, is to preserve cash flow and personal liquidity. If the stock market generates an 8-percent return and you can borrow at 4 percent, borrowing on your aircraft instead of paying cash can theoretically generate an additional 4-percent return.

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Adam Meredith

Adam Meredith

President of AOPA Aviation Finance Company
Adam Meredith, President of AOPA Aviation Finance Company, is an aircraft finance professional with more than 15 years lending, small business management and customer service experience. Adam is a commercial pilot with multi-engine and instrument ratings.

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