How Does Aircraft Financing Work Explained

Aircraft financing allows individuals and businesses to acquire aircraft, from small personal planes to large commercial jets. Due to substantial cost, most buyers seek external funding. This financing involves structures and processes tailored to the aviation industry. Understanding the mechanisms and requirements for securing aircraft financing is important for prospective owners.

Common Structures for Aircraft Financing

Secured aircraft loans are a primary method for acquiring aircraft, collateralized by the aircraft itself. These long-term arrangements include amortizing loans, featuring fixed payments that gradually reduce the principal, and balloon loans, involving lower regular payments followed by a substantial final payment. Lenders assess the loan-to-value (LTV) ratio by comparing the loan amount to the aircraft’s appraised value. Down payments reduce the LTV and lender’s risk. Interest rates and repayment periods vary based on borrower creditworthiness and aircraft specifications.

Aircraft leasing provides an alternative to outright ownership, allowing aircraft operation without holding title. Operating leases are shorter-term agreements for aircraft use, with no ownership transfer at lease end. This structure offers flexibility for temporary use or fleet adjustments. Finance leases, also known as capital leases, are longer-term arrangements resembling a purchase, often including an option to buy the aircraft at lease end. Under finance leases, the aircraft is treated as an asset on the user’s balance sheet, impacting financial reporting differently than an operating lease.

The difference between securing an aircraft loan and entering a lease lies in ownership and balance sheet treatment. With a secured loan, the borrower owns the aircraft from the outset, carrying it as an asset and corresponding debt on their balance sheet. Conversely, an operating lease keeps the aircraft off the user’s balance sheet, providing operational flexibility without long-term asset commitment. Finance leases, while providing use without immediate title transfer, still require the aircraft to be recognized as an asset and a liability on the user’s financial statements due to the transfer of ownership risks and rewards.

Key Information for Financing Applications

Prospective borrowers must compile a financial profile for aircraft financing. Lenders scrutinize credit history, personal and business, seeking financial responsibility. Income and asset verification are required, often via personal and business tax returns for the past two years, and bank and brokerage statements for liquidity. Lenders also evaluate existing liabilities and debt-to-income ratios to determine repayment capacity; some require a debt-to-income ratio below 46% including the new aircraft payment. Personal guarantees are often required for business entities, obligating individual owners to repay the loan if the business defaults.

Information about the aircraft is important for the financing application. This includes its make, model, year, and serial number. Lenders require documentation of its current condition, maintenance history, and complete logbooks to assess value and airworthiness. The intended use (personal recreation, charter services, or other commercial operations) influences the lender’s risk assessment and financing terms. An independent appraisal or valuation is required to determine market value, which lenders use to establish the loan amount and loan-to-value ratio.

Applicants need to define their proposed financing terms. This includes specifying the desired loan or lease amount, which lenders compare against the aircraft’s appraised value. The down payment or security deposit is a significant factor; a higher down payment reduces the loan-to-value ratio and lender’s risk, leading to more favorable terms. Most lenders seek a down payment of 15% to 20% of the aircraft’s value. The preferred repayment period should be outlined, influencing the monthly payment and total interest paid.

The Aircraft Financing Application and Approval Process

Once all information has been gathered, application submission begins, often via online portals or direct submission to aviation lenders. The lender conducts an initial review to ensure the application package is complete and all required documents are present. This step is important, as incomplete applications can cause processing delays.

Following submission, the application moves into the underwriting and evaluation phase, where lenders analyze the submitted financial information and aircraft details. This involves credit checks, financial analysis of the borrower’s capacity to repay, and a review of the aircraft appraisal. Lenders examine the aircraft’s age, maintenance history, and logbooks, as these affect its value and the lender’s collateral. During this phase, the lender may request additional documentation or clarification, requiring prompt responses from the applicant.

If the underwriting process yields a favorable assessment, the lender will issue a term sheet, a non-binding outline of the proposed financing terms. This document details the loan amount, interest rate, repayment schedule, and any covenants or conditions. Borrowers can then review and negotiate these terms to align with their financial objectives.

The final stages involve due diligence and closing. Lenders conduct verifications, including a pre-purchase inspection of the aircraft by a third party to confirm its condition. A title search is performed through the Federal Aviation Administration (FAA) Aircraft Registry to identify any liens or encumbrances, ensuring a clear title for transfer. Once all conditions are met and the terms are finalized, the borrower signs the loan or lease agreements. The funding process follows, with loan proceeds disbursed, and ownership or registration documents, such as security agreements, filed with the FAA.

Post-Financing Considerations

Once aircraft financing is secured, several ongoing considerations become part of the ownership or lease arrangement. Aircraft insurance is a requirement, encompassing hull and liability coverage. Lenders mandate this insurance as a condition of financing, often requiring themselves to be listed as an additional insured or loss payee on the policy. Hull coverage is required to be at least equal to the loan amount or the aircraft’s purchase price.

Beyond financing payments, aircraft ownership or operation entails ongoing costs. These include fuel expenses, hangar or tie-down fees, scheduled maintenance, and inspections. Lenders or lessors may impose maintenance covenants, requiring the aircraft to be maintained according to certain standards and often requiring reporting of maintenance activities. Understanding these operational expenses is important for managing the financial commitment associated with the aircraft.

Refinancing options may become available over time, allowing a borrower to replace an existing loan with a new one, often to secure a lower interest rate, adjust the repayment period, or access equity for upgrades. This process involves assessing current loan details, comparing offers from lenders, and meeting new eligibility criteria. Refinancing can align financing terms with current market conditions or changes in the borrower’s financial situation.

Considerations for early payoff are important. Some aircraft loans may include prepayment penalties, which are fees charged by the lender if the loan is paid off before maturity. These penalties compensate the lender for lost interest income and administrative costs. While some lenders may allow additional principal payments without penalty, others may apply a penalty, often around 1% to 1.25% of the original loan balance for the first 24 months. Borrowers should review their loan agreements to understand any such terms before considering an early payoff.