Are you an aspiring airplane owner looking to navigate the realm of aviation finance for the first time? It can seem quite daunting, but we’re here to help. This comprehensive guide will equip you with everything you need to know about the process of securing aircraft loans. We will demystify all the terminologies and will discuss common financing rates and terms, as well as the various options for aircraft loan financing that are available.
Aircraft Financing: A Bird’s Eye View
Understanding how to finance an aircraft is the first step towards making your dream of aircraft ownership come true. Getting approved for aircraft financing is very similar to applying for a mortgage. Typically, aviation lenders require a full financial package, including 2-3 years of Personal and Business Tax Returns, a Personal Financial Statement, debt schedules for your businesses, and bank and brokerage statements to back up your liquid holdings. A Personal Financial Statement, showing your assets and liabilities, is also usually required.
Aircraft Purchase: The Basics
Buying an airplane involves a significant financial outlay. While some buyers choose to pay cash, others prefer to finance, giving them more purchasing options. The loan amount available to you will depends on a number of factors, including:
- The value of the aircraft – lenders will determine the value of an aircraft by using industry-standard valuation tools such as Vref and Bluebook. In some cases, they may require a professional appraisal. Lenders will typically loan 75% – 85% of an aircraft’s value or purchase price, whichever is less.
- The age of the aircraft – some lenders won’t loan on aircraft older than 20 years, but there are many that will, especially for piston aircraft. The Aircraft Lenders has financing sources for most ages and types of aircraft.
- Your financial profile:
- Credit Score – aircraft lenders generally look for a credit score of 700+, with no late pays or derogatory reports in the past 2 years
- Credit History – lenders like to see that you have a history of borrowing at a comparable level to your current borrowing request. Revolving credit experience is not as important as a good repayment history with installment loans.
- Debt-to-income Ratios – lenders generally want to see a debt-to-income ratio no higher than 45%, after adding in the new aircraft payment
- Liquidity Buffer – lenders want to see that you have a liquid cushion (cash or marketable securities in the bank), beyond the down payment. They generally like to see that you have 6 months of total debt service coverage held liquid, after the down payment. They also look to see that you have a cushion for maintenance costs.
- Payment-to-income ratios – some lenders require that your aircraft payment be no higher than 10% -15% of your monthly income.
Airplane Financing Rates
Just as with any other loan, airplane financing rates are a critical factor to consider. Banks set interest rates on loans using the federal funds rate, prime rate, and state laws regarding rates for different types of financial products. Other factors that influence rate are the type of aircraft you are financing, its age, your credit score, and loan amount. It’s essential to comparison shop against various aircraft financing companies to acquire the best possible rates. That’s why it often makes sense to work with a reputable aircraft financing broker such as The Aircraft Lenders, as they have already done the work of comparison shopping for you.
Aircraft Leasing: An Alternative Path
Aircraft leasing offers a different kind of financing and is usually only open to businesses. With leasing, the lender generally retains title to the aircraft. Here are a few different types of leases:
- Operating leases – these are the equivalent to renting an aircraft, but they offer a long-term contract to do so, with a monthly payment involved. All maintenance costs are usually covered by the lessee in these cases.
- Lease-to-purchase – some leases are structured so that you have a buy-out option at the end of the lease. The lessor usually retains title.
- Sale-leaseback – this is a lease product in which a lender will purchase an aircraft that you want to acquire, or even one you already own, and lease it back to you. This can work well for companies that don’t want to put up a traditional down payment, as financing is often at 100%.
Understanding Your Options
To make the best decision, it’s crucial to understand your aircraft financing options thoroughly. Working with an aircraft financing broker such as The Aircraft Lenders will ensure that you understand all the options that may be available to you. The best financing brokers will also work to understand and present your financial package to lenders in their best light.
Frequently Asked Questions
How do Aircraft Loans Work?
An aircraft loan works similarly to any other loan. The lender provides funds to purchase the aircraft, and the borrower pays the loan back along with any interest over time. The lender secures their interest in the aircraft by placing a lien on the aircraft with the FAA.
Why do lenders need my financials when they could simply repossess the aircraft if I default?
Lenders are not in the business of aircraft ownership or aircraft sales. They do not want to own your aircraft. They do a thorough review of financials to ensure that you have enough cash flow and liquidity to support the loan payments and other costs that go along with aircraft ownership.
What Factors Affect Airplane Financing Rates and Terms?
Several factors affect airplane financing rates, including your credit score, the amount you borrow, the type of aircraft you are financing, the age of the aircraft, your current debt load, your cash flow, and the lender’s terms and conditions. Lenders use filed tax returns to determine income.
Why work with an aircraft financing broker?
Aircraft financing brokers do the work of loan shopping for you. Why would you want to work with one lender at a time when you can consult with an industry expert that already knows the best rates and terms available for the aircraft you are financing, your financial profile, and your aircraft mission? The Aircraft Lenders is standing by to help. Please get in touch to have a chat about the best financing options that may be available to you.
