Financing your Airplane

So. . . how do you go about getting financing for your airplane?  If you plan in advance, you can ensure a painless process!

1.  Aircraft Finance Company or Personal/Business bank?

Sometimes your relationship with your bank can be very valuable when you need financing. Consider however, the expertise needed to deal with the FAA, aviation risk, and the unique tax benefits of an airplane to a business owner who shows intentionally low income statements.  The aircraft finance companies understand and have expertise in these areas and therefore can extend excellent interest rates and terms in contrast to bank lenders who may be uncomfortable with this type of risk and extend rates to reflect their uneasiness.

2.  When should you apply for financing?

While the process is not a lengthy one,  it’s always comforting  to have an approval in hand early in the process.  This will allow you to move quickly if the need arises.

3.  What information will I need to provide?

Generally, you’ll need to show a good credit history, 2 years of tax returns and a personal financial statement.  Let’s address each item briefly:

Credit History:  It’s a good idea to check your credit report prior to applying for financing.  In fact, it’s a good idea to check for inaccuracies on a regular basis, perhaps once a year.  You can do this simply online and many times the report is free to the consumer.

Your own report may surprise you!  Wrong names, addresses, open mortgages, credit cards you never applied for. . . all may show up on your account!  Follow the credit reporting company’s instructions for correcting the mistakes and make sure you have written records of  all of your corrective actions.  Any unused credit accounts should also be closed as they could be seen as potential available credit and affect your debt ratio.  (We’ll cover this later in this report).  Don’t just “cut up the card”. . . you must close the account  and request the report reflect the account was closed by you.

2 years of tax returns:  Finance companies will grant an approval based on cash flow and “ability to make the payment.”  Therefore, your past two years of income are meaningful, and your future income potential is nothing but speculation.  Together, your credit report and proof of income will provide the “snapshot” need by the finance company to grant an approval.  Here’s how they see it:

total monthly debt including airplane payment   =   debt ratio
Total Monthly gross income

The debt ratio must be under 42% for a “quick approval.”

So why do you want a “quick approval?”  Well, if you’re outside of the 42% ratio, you may still qualify for financing, however you may be providing plenty of additional paperwork!


Options if your debt ratio is above 42%

Larger down payment:  This lowers the loan amount and thus the monthly payment.  A lower payment will reduce your debt ratio.

Pay off high interest debt:  You can lower your monthly debt substantially by paying off high interest debt like credit cards, or reconfiguring debt with lower interest rate loans.  Perhaps a home equity loan to pay off your high interest debt.

Bank Guarantee (Letter of Credit): Sometimes your relationship with your bank can be beneficial in a situation like this.  Your bank may not be comfortable with an aircraft loan, however your lender knows you and may be comfortable writing a letter of credit based on your history and reputation.  With 2 years of payments guaranteed, the aircraft finance company is also comfortable.


4.  Can a payment for a new airplane be lower than the payment for a pre-owned?

Believe it or not, it’s usually easier to qualify for  a new aircraft because the interest rates are much better (they’re subsidized by the manufacturer) and the term is longer.  The lower interest rate could mean thousands of dollars in interest savings over the course of the loan, and the down payment is often about half that of a pre-owned.  This lower payment results in easier qualification due to the lower debt ratio.


5Do all aircraft finance companies work the same way?

Generally, yes!  However, the debt ratios and credit scores may vary slightly.


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