A Step-By-Step Guide to Walk You Through the Process of Obtaining an Airplane Loan

By Andrew Myers

January 28, 2020 Educational

The highest cost of owning an aircraft is the cost of the plane itself. For those who are looking for financing options, keep reading, and I'll tell you to want you to need to know about aircraft loans.

Airplane Loan Options

There are two common types of loans that you can use to buy an aircraft. Let's take a closer look at each one so you can decide which is right for you.

Asset-Based Loans

This type of loan was all the rage twenty years ago, and while some banks state they still offer it, the truth is asset-based aviation loans are just not that common. An asset-based loan is just that, the aircraft or asset backs the loan amount, not your credit. You still have personal guarantees, and most banks will even require a hefty down payment. 75% loan to value is commonplace these days. The higher the risk, the worse the terms. So if you are looking at a 20-year-old business jet and want non-recourse (no personal guarantee) along with an asset-based term sheet, chances are it is not going to happen. However, there are numerous lenders, albeit non-traditional financing companies that will consider it. I always suggest that a borrower starts with the bank they have the best relationship with and gather numerous proposals BEFORE you sign a letter of intent.

Credit-Based Loans

Credit-based loans are what the vast majority of buyers will select for an aircraft loan. Terms are straight forward, and yes, you will sign a personal guarantee. Interest rates, terms length, and upfront fees are negotiable to some extent, but also tied to your overall creditworthiness. You have numerous options when it comes to borrowing. You can go to a large commercial bank, or a credit union, or even to a boutique aircraft lender. There are finance companies as well as banks. Finance companies differ in that they are more flexible than the traditional lender; this is because state and federal, banking rules, and compliance govern the conventional lender.

Airplane Purchasing Process

No matter what type of loan you're getting, the purchasing process will be the same. Let's take a quick look at how to buy an airplane.

1. Decide on a Plane and Set Your Budget

This step will likely take the most time, but that's a good thing. You'll want to make sure you know what type of aircraft will suit your needs (mission profile) and then budget accordingly. Remember, most lenders will want to see that you are not overpaying for the plane (this requires an appraisal, more on this later), and there is a reason why. In the event of a default, the aircraft will become an asset on the balance sheet of the bank or lender. After the great recession of 2008, lenders are more selective about the types of aircraft they will loan on. Most banks will not loan on an older business jet; some will not fund on aircraft older than 15-years. For piston aircraft, this is not a concern.

2. Get Pre-Approved for a Loan

With your budget in mind, you can then find a lender that will work with you and get pre-approved for a loan. Having the pre-approval paperwork in hand will make it easier to negotiate as you find the perfect plane for you. Timing is everything with this step, so make sure you have your documentation in order. You will need tax returns, financial statements, and you need to determine how you will structure the ownership of the aircraft. Determining who will buy the plane (are you using an entity, is the aircraft being purchased by a company?) is just as crucial as any of the other steps. There are numerous tax consequences to messing this one up, so talk to your accountant and get organized before you find yourself up against a ticking clock with pressure to close.

3. Find a Plane and Have it Appraised

The pre-buy and inspections are more steps that will take a while, but they are vital if you want to find a great aircraft at a reasonable price. Once you think you found your future airplane, get a professional appraisal from VREF Aircraft Appraisal Services. An accredited appraiser with decades of experience will help you avoid over-paying and provide you with critical data for both you and your lender. Appraisers conducting a desktop appraisal will require the aircraft specification, photos, equipment lists, and maintenance data to determine the Fair Market Value of the aircraft.

4. Sign the Loan Agreement and Pay for Your Aircraft

When you have everything lined up, all that's left is to finalize your aircraft loan and pay the seller. Then you will officially own your airplane. But did you know you still have some options? You can lease the aircraft; this is more common on business jets. If you are confused as to whether or not there are tax benefits, consult your accountant. Double-check the loan agreements, and limit your exposure to pre-payment penalties.

Ready to Buy?

Now you know the steps needed to get an airplane loan. As you can see, it's easier than you think to buy an aircraft, whether it's for personal or professional reasons. If you're ready to have your future aircraft appraised, contact us today. We'd be more than happy to make sure you're getting a fair price and that you can be successful in getting a loan.