How to Finance an Airplane: The Process Explained

Airplane financing allows individuals and businesses to acquire aircraft without paying the full cost upfront. This process involves specialized financial institutions that understand the unique aspects of aviation. Unlike typical vehicle or home loans, aircraft financing involves higher values, a specific regulatory environment, and a specialized lending market. The high cost and mobility of aircraft, which often operate across multiple jurisdictions, introduce complexities for financiers, influencing how they structure investments and manage risk.

Types of Airplane Financing

Secured aircraft loans are a primary financing option, using the aircraft as collateral. Repayment periods range from 5 to 20 years, with interest rates typically between 4% and 10%, varying by market conditions, creditworthiness, and loan term. Specialized aviation lenders and commercial banks offer these loans, requiring a down payment of 15% for personal-use aircraft or 20% for loans over $1 million. A lien is placed on the aircraft, protecting the lender’s interest in case of default.

Aircraft leasing is another common method, categorized into operating leases and finance leases. Operating leases function as rental agreements, where the lessor retains ownership. These are short-term agreements, spanning 2 to 7 years, offering flexibility and avoiding long-term ownership responsibilities. The aircraft does not appear on the lessee’s balance sheet, and the lessor benefits from tax depreciation.

Finance leases, also known as capital leases, resemble a purchase agreement where the lessee gains the benefits and risks of ownership. While the lessor initially holds legal title, the lessee effectively “owns” the aircraft for accounting and tax purposes, claiming depreciation deductions and deducting interest paid to creditors. This structure includes an option for the lessee to acquire full ownership at the end of the lease term. Finance leases are long-term arrangements, extending over 75% of the aircraft’s lifespan.

Beyond these primary options, less common financing methods include personal loans or lines of credit, limited to smaller aircraft or for covering down payments. Direct lending, involving a secured or unsecured loan from a bank or syndicate of banks, is also used, particularly for commercial aircraft where a single bank might not have sufficient capital.

Eligibility and Application Requirements

Securing airplane financing depends on the applicant’s financial health. Lenders scrutinize credit scores, as a strong credit history demonstrates reliability in managing debt. They also assess income stability and the debt-to-income (DTI) ratio, which measures an applicant’s ability to repay new debt relative to existing obligations. Most lenders prefer a DTI ratio below 46% once the aircraft purchase is factored into total monthly debt payments.

Lenders examine an applicant’s net worth and liquidity, assessing overall financial standing, including assets and readily available funds. This assessment requires providing recent bank statements to confirm liquidity. A down payment is required, typically ranging from 15% to 20% of the aircraft’s purchase price, depending on its use and loan amount.

Aircraft-specific information plays a role in eligibility. The make, model, age, and condition of the aircraft influence a lender’s assessment of its value and risk; older aircraft may have shorter financing terms. Lenders also consider the intended use, differentiating between private operations (e.g., under Federal Aviation Regulations Part 91) and commercial operations (e.g., under Part 135), as commercial use may involve more restrictive regulations and training requirements.

Applicants must provide the aircraft’s registration number, or N-Number. Complete and up-to-date maintenance records, including logbook entries, annual inspections, and any required phase inspections, are essential. Lenders request copies of the most recent annual inspection and other recent phase inspections.

Required documentation for the application process is extensive. This includes:
Personal financial statements, including two to three years of federal tax returns, W-2 forms, and recent pay stubs.
Bank statements for the last three months for all accounts.
For business owners or self-employed individuals: two years of business tax returns, year-to-date financial statements (balance sheet and profit & loss statement), a detailed debt schedule, and K-1 forms (if applicable).
The aircraft purchase agreement or bill of sale, along with aircraft specifications and logbooks.
Pilot certificates and ratings (may be requested depending on lender and aircraft type).

The Airplane Financing Process

After gathering necessary information, the next step involves finding a suitable lender. Specialized aviation lenders and banks with aviation finance departments are sources for aircraft loans. These institutions possess expertise in aircraft valuation and regulations.

The application submission occurs through online portals, mail, or in-person. Borrowers submit financial statements, tax returns, credit history, and aircraft details. Providing accurate and complete information is important to avoid processing delays.

Following submission, the lender initiates the underwriting and appraisal phase. This involves a review of the applicant’s creditworthiness and financial stability. The aircraft undergoes a valuation, requiring an independent appraisal to determine its market value and ensure it serves as sufficient collateral. Lenders also review the aircraft’s logbooks and maintenance history to assess its condition.

Upon a successful review, the applicant may receive a conditional approval. This approval comes with specific conditions that must be met before finalization, such as satisfactory results from a pre-purchase inspection or verification of adequate aircraft insurance. The pre-approval remains valid for up to 90 days, allowing time to finalize aircraft selection if not already done.

Closing the loan involves signing legal documents, including a promissory note and an aircraft security agreement pledging the aircraft as collateral. A lien is established with the Federal Aviation Administration (FAA) Aircraft Registry. Funds are then disbursed to the seller, completing the transaction. Post-closing, borrowers must adhere to the loan terms and maintain required insurance coverage throughout the loan’s duration.

Key Considerations for Airplane Financing

A professional aircraft appraisal and valuation are important for financing. An appraisal provides an unbiased opinion of the aircraft’s market value, which lenders use to determine the appropriate loan amount and the loan-to-value (LTV) ratio. Appraisals consider factors like the aircraft’s age, condition, flight hours, maintenance program enrollment, and installed equipment. A full on-site appraisal takes around 10 days, involving research, data collection, and a comprehensive report.

Aircraft insurance is a mandatory requirement for lenders, who require both hull coverage (protecting the physical aircraft against damage) and liability coverage. Hull coverage must be sufficient to cover the lender’s loan or lien amount, equal to the agreed-upon value of the aircraft. Lenders require a “Breach of Warranty” endorsement, which protects their security interest even if the policyholder commits an act that would void coverage for the owner. Insurers also consider pilot qualifications, total flight hours, and recency of flight experience when determining premiums and coverage. Deductibles range from 2% to 4% of the aircraft’s agreed value.

A pre-purchase inspection (PPI) is an independent mechanical inspection conducted before buying an aircraft. This evaluation, performed by a licensed aviation mechanic, uncovers potential issues affecting the aircraft’s value, safety, or operational costs. While not mandated by FAA regulations, aviation lenders require a PPI to mitigate their risk, as the aircraft serves as collateral. The findings from a PPI can influence financing terms or the decision to proceed with the purchase, and any airworthiness discrepancies fall to the seller to rectify. The buyer covers the cost of the inspection.

The FAA Aircraft Registry plays a role in establishing ownership and liens on aircraft. All documents related to interests in aircraft, including security agreements and liens, are filed with the FAA Registry in Oklahoma City, Oklahoma. A clear title is essential for financing, and a title search is conducted to ensure no outstanding debts or encumbrances exist against the aircraft. The FAA charges a filing fee of $5.00 for each document recorded per aircraft. Escrow services are used in aircraft transactions to ensure all funds and documents are properly handled and disbursed at closing.

Interest rates and fees are financial considerations. Aircraft loan rates are influenced by factors such as the borrower’s creditworthiness, the loan term, and prevailing market conditions. These rates are higher than those for auto or home loans due to the increased risk associated with aircraft financing. Common fees include origination fees, appraisal fees, and closing costs. Closing costs can vary, sometimes based on a percentage of the transaction size.