Aircraft financing options are an important consideration when acquiring an aircraft — and for many buyers, balloon payments offer a flexible solution to make ownership possible without tying up excessive capital. But like any financial tool, balloon payments come with pros, cons, and important factors to consider.
Let’s take a look at what balloon payments are, how they work in aircraft loans, and what you should keep in mind when considering this structure.
What Are Balloon Payments in Aircraft Loans?
A balloon payment structure is often used in aircraft loans. These types of loans offer a fixed monthly payment over a defined term (5 years is common). However, payments are structured with a longer amortization schedule, often 15-20 years, so the payments are lower. At the end of the term, there is a balloon payment due to pay off the balance. Balloon loans offer lower monthly payments but require one large “balloon” payment at the end of the loan term. Here’s an example:
- $500k purchase price
- $425k loan amount
- 5-year term/15-year amortization
- Example financing rate of 6.49%
- Monthly payment $3700 for 5 years ($3700 is the payment needed for full payoff on the loan in 15 years)
- Balloon payment of $324,051 due after the 5th year (balance due on the note after paying 60 payments of $3700 each)
Common balloon payment structures include:
- Partial Balloon: Smaller payments throughout the term with a significant lump sum due at maturity.
- Fully Amortized with Balloon: Payments are calculated as if on a longer-term loan but come due sooner with a final balloon. This is the most common balloon structure.
- Interest-Only Balloon: Monthly payments cover interest only, with the entire principal due as a balloon payment at the end.
Advantages of Choosing Balloon Payment Options for Aircraft Loans
- Improved Cash Flow: Balloon payment structures can free up monthly cash flow, giving aircraft owners flexibility to invest funds elsewhere — such as in business growth or other investments — while keeping monthly loan payments low.
- Potential Tax Advantages: Depending on your financial and tax situation, you might benefit from interest deductions or optimized depreciation strategies related to your aircraft financing. Always consult your tax advisor to make the most of these potential benefits.
- Market Flexibility: Aircraft values change over time due to technology advances, market demand, and economic conditions. Balloon payments give you flexibility to refinance, sell, or upgrade the aircraft when the balloon comes due, keeping you in tune with market realities.
Risks and Considerations with Balloon Payment Aircraft Loans
- Large Final Payment: The biggest downside? You’ll owe a large final payment — the balloon — when the loan matures. You’ll need a solid plan in place to either pay off or refinance this amount.
- Refinancing Risk: Market conditions can shift, and refinancing may not always be favorable when the time comes. Maintaining strong credit and financial health is essential throughout the life of your aircraft loan.
- Aircraft Depreciation: Aircraft can depreciate faster than expected, which could leave you with a balloon payment that exceeds the aircraft’s current value. Regular valuations and market assessments help reduce this risk.
Best Practices for Balloon Payment Aircraft Financing
- Work with experienced aircraft lenders or aircraft financing brokers who understand market trends and aircraft values — like The Aircraft Lenders.
- Set aside reserve capital in case refinancing isn’t an option.
- Plan ahead with exit strategies such as selling, refinancing, or upgrading the aircraft before the balloon comes due.
Is a Balloon Payment Structure Right for You?
Balloon payments in aircraft financing can be a smart, flexible tool — but they require careful planning. Whether you’re financing a personal aircraft or adding to a business fleet, The Aircraft Lenders can help structure the right loan for your needs and long-term goals.
