NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses adjustable rates and your aircraft purchase.
The classic answer is, "It depends." The answer lies in what your time horizon is for holding onto the aircraft you are buying.
Most lenders offering adjustable rates will have an interest rate floor. And for most of them, that floor is only slight lower than where rates are currently. Remember, lenders have floors because they incur real costs in lending money and also seen rates go negative. Interest rate floors allow them to cover their costs and remain solvent. Therefore, while anyone with an adjustable rate could benefit if rates drop slightly and/or stay flat, borrowers with longer-term hold time horizon risk paying more when interest rates start eventually going back up.
That said, the latest economic projections indicate the current economic situation we find ourselves in is likely to last between 18 months and two years. Given that the average hold time is somewhere around four years, that means there are a number of people who are holding their aircraft for only a couple of years or less. So, if your time horizon to own an aircraft is less than a couple of years, then yes, absolutely, this is a great time to look at floating rates.
If your hold time is greater than two to three years, you risk becoming exposed to interest rates floating higher when the economy starts picking up steam. It's not unlikely that the Fed may increase rates in order to stave off inflation. That'll increase the cost of your loan.
This article was originally published by AOPA Finance on April 30, 2020.