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Finance: Demand sideFinance: Demand side

In uncertain times, lenders may not look to lend

As in all markets, there’s a supply side and a demand side for aircraft loans. Think of the supply side as AOPA Aviation Finance clients—people in the market to buy an airplane. It may seem counter-intuitive, but lenders represent the demand side in this market.
Turbine Pilot Finance

In previous articles, I’ve written about Fed rate changes from the perspective of the borrower, the supply side. I’ve written that a lowering of Fed short-term money, usually 30-day money, may not correlate to a lowering in interest rates on long-term money (5-, 10-, 15-, or 20-year).

There are two general reasons why. One is the Fed tends to signal its intent far enough in advance that lenders price in that new rate for subsequent loans. Another is due to a lender’s cost of business. Let’s say a lender requires a spread in its aircraft loan portfolio of 200 to 235 basis points above its cost of money to stay afloat. If its cost of money is 2 percent, then its average lending rate will need to be 4.35 percent. A Fed rate lower than that will simply not work.

Does that mean lenders miss out on lending opportunities? It depends. If a finance company is in the market for making loans, then yes. But if it’s not, then no. The “no” depends upon the finance company’s appetite, or demand, for loan-making.

We think that banks are always in the mood to make a loan. After all, loans are a bank’s assets, and who wouldn’t want more assets, right? But there are unusual times, there are environments and there are situations when a bank has little or no appetite to assume more loans. This is one of those times.

The current pandemic and its deleterious effect on both the global economy and on Wall Street have banks concerned about what 2021 will look like. Couple that with the fact that the current low interest rate atmosphere has many banks already booked solid on loans as well as being at the lowest end of their profit margins on those loans, and we find ourselves in a unique moment where banks are willing to avoid the risk inherent in making aircraft loans.AOPA

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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.
Aero-Space Reports

Aero Space Reports

Sponsor of Aviation Finance
Aero-Space Reports, a third-generation family-owned business, has been a leader in the aviation title industry for more than 45 years. In that time, they’ve seen tens of thousands of aircraft purchases: They’re all too familiar with what can go wrong, and they know exactly what it takes for things to go right.