How Exactly Does Aircraft Financing Work?
September 21, 2009 — AirFleet
We at AirFleet Capital frequently receive the following question when we talk to prospective customers – “how does aircraft financing work?” It’s a great question because aircraft financing for general aviation (GA) aircraft really is unique. We have a sample quote below for a typical aircraft that AirFleet Capital would finance. We’ll use its different parts to serve as the template to guide through the components of aircraft financing.
Sample Aircraft: 1997 Mooney Bravo
Purchase Price: $180,000
Use: 50% personal, 50% business
Down Payment: $27,000 (15%)
Finance Amount: $153,000
Interest Rate: 6.5% fixed
Term / Amortization: 20 yrs / 20 yrs
Monthly Payment: $1,140.73
AirFleet Capital finances piston-driven, turbo-prop, and jet aircraft. Piston aircraft manufactured before 1960 get increasingly harder to finance as they get older. Each aircraft in this age range would have financing offered on a case-by-case basis. However you will find that aircraft manufactured in 1970 or newer are typically easier to finance. Older turbo-props and jets have more restrictions, typically with aircraft older than 1980 being harder to finance. Financing for these aircraft are also offered on a case-by-case basis, but there is a strict 10,000 hour airframe limit.
Purchase Price & Interest Rate
The purchase price is closely related to the offered interest rate. Unlike other assets (homes, cars, boats) the aircraft’s purchase price and the respective loan amount is what drives the interest rate charged, not the borrower’s credit score. Relevant thresholds are the $50,000, $100,000, $250,000, and $1,000,000 marks. Generally, higher loan amounts see lower interest rates, with some exceptions. The standard rate program is fixed. There are some variable rate programs available today, but they are not common. Interest rates will be higher for commercial use aircraft.
Aircraft usage is an important component as well. Aircraft that are used for personal or private business (part 91) use have lower down-payment requirements, longer terms, and lower interest rates than those used for commercial use (charter, flight school, etc). This is due to the increased utilization of commercial-use aircraft. These aircraft often fly a lot more each month; resulting in higher wear and tear which collectively devalue the asset faster. Loans are structured to compensate and prevent owners from being upside down.
A standard down payment is 15% of the purchase price. The standard used to be 10% before the financial crisis and the devaluation trend of all aircraft in the past year. GA aircraft financing does not feature 0% down programs. In some cases, 10% (with a rate premium) may be available for a client with exceptional credit, but the client may pay a premium rate-wise. Commercial use aircraft require between 20% to 30% down, depending upon the length of the term desired. Typically, the higher the down-payment, the longer the term available.
Term & Amortization
Generally terms and amortizations are for the same length of time. Some balloon programs exist where you will have amortized payments for a 20-year schedule and a 5-year term – with a balloon coming due on the balance of the term (a principal balance would be due). Aircraft manufactured from 1976 and on can have terms up to 20 years, while aircraft older than this will have terms between 10 to 15 years maximum. Commercial use aircraft will also have shortened loan lengths, as the aircraft devalues more quickly in a higher use environment.
The monthly payment works just like a mortgage payment, with mostly interest and little principal paid down each month in the first few years. For example, with a 20-year term, if a client makes the minimum monthly payments they’ll gain about 2% equity (principal paid down) in the first year. As time goes on, the principal increases and the interest decreases. Often times with GA aircraft loans, there are no pre-payment penalties, so you can pay the loan down early without incurring additional costs.
This just about covers all of the nuts and bolts to a standard aircraft loan quote from AirFleet Capital. If you have any questions, feel free to post below or you can contact us. One of the most common introductions we hear starts with “I have this plane I’m looking at…”