When financing an aircraft, two key ratios shape the deal: Loan-to-Value (LTV) and Loan-to-Cost (LTC). While LTV compares the loan amount to the appraised or market value of the aircraft, LTC compares it to the actual purchase cost. Both ratios help lenders assess risk—and they influence how much you can borrow, the terms you receive, and how your aircraft financing package is structured.
What Are LTV and LTC?
The Loan-to-Value (LTV) Ratio is the relationship between the amount of financing obtained and the appraised or market value of the aircraft. Expressed as a percentage, a higher LTV is generally granted for newer aircraft, Part 91 missions with low utilization, aircraft with a strong secondary market, and borrowers with strong financial profiles. Lower LTVs are generally offered aircraft with a less robust secondary market, for charter missions or missions with high utilization, and weaker financial packages.
Loan-to-Cost (LTC) compares the loan amount to the total purchase price of the aircraft.
Understanding LTV and LTC in Aircraft Financing
Let’s illustrate this through an example. If you’re buying an aircraft for $10 million, and it appraises at $9.5 million, a lender offering 80% LTV may cap the loan at $7.6 million. If the same lender offers 85% LTC, based on your actual cost, the cap would be $8.5 million. In cases like this, LTV often becomes the limiting factor, especially if the aircraft is priced above market value.
Why These Ratios Matter
1. Risk Management
Lenders prefer lower LTV and LTC ratios because they reduce exposure. For borrowers, this means that putting more money down (reducing both ratios) can improve your odds of securing better terms—like lower interest rates or longer amortization periods.
2. Deal Structuring
If you’re purchasing a newly refurbished aircraft or one with high demand, the appraised value and actual cost may align closely, keeping both LTV and LTC in balance. But if you’re buying above market or making major upgrades post-sale, lenders will scrutinize LTV more heavily than LTC, potentially reducing the loan amount or tightening terms.
Strategies for Managing LTV and LTC
- Get a Solid Appraisal: Accurate valuations protect both you and the lender. A reliable third-party appraisal will clarify how much lenders will actually finance and avoid surprises mid-transaction. Lenders usually want to order their own appraisals to ensure impartiality, but it doesn’t hurt to arm yourself with your own research on values and recent comparable transactions, or by connecting with an appraiser yourself.
- Understand the Purchase Price vs. Market Value: If your offer is significantly above appraised value, be prepared to fund the gap yourself. Lenders will base the LTV on appraised value, not what you paid.
- Increase Equity Contribution: The more you put down, the stronger your financing terms. Lower ratios signal financial strength and reduce lender risk, often resulting in better loan conditions.
Maintaining Healthy Ratios Over Time
- Annual Appraisals: Keep track of your aircraft’s current market value to manage your LTV as the loan matures.
- Accelerated Repayment: Paying down principal faster improves your LTV over time and can support future refinancing or resale.
- Ongoing Maintenance: Well-documented, consistent upkeep preserves aircraft value and collateral strength.
- Smart Asset Planning: If you own or plan to own multiple aircraft, diversifying asset types can help balance your overall financial exposure.
Pitfalls to Avoid
- Ignoring Appraisals: Don’t rely solely on what you paid—banks won’t.
- Overextending Credit: Borrowing too close to your cost or value limits leaves little room for market fluctuation.
- Underestimating Market Shifts: Aircraft values are sensitive to market trends, economic shifts, and regulation changes. Stay informed to avoid unfavorable surprises.
FAQs
What’s a healthy LTV and LTC ratio for aircraft financing?
- Most lenders offer 70–85% LTV and LTC. Specific offers depend on the aircraft’s age, use case, and your financial profile. Which ratio do lenders care more about—LTV or LTC?
- Lenders typically use LTV as the stricter benchmark, especially when the purchase price exceeds market value.
Can I negotiate better terms by lowering my LTV or LTC?
- Yes, you frequently can. Lower ratios show strength and reduce lender risk, often leading to more competitive financing terms.
Bottom Line:
Managing your Loan-to-Value and Loan-to-Cost ratios is essential to securing favorable aircraft financing. Know the difference, plan your equity contribution strategically, and keep both ratios in check as your asset matures. The more informed and proactive you are, the stronger your position in the aviation finance landscape. Established aircraft financing brokers such as The Aircraft Lenders can help you get a handle on your aircraft’s value before you approach a lender, ensuring that you don’t overpay and/or get an unexpectedly low LTV for your aircraft loan.
