NAFA Administrator posted an articleDo Most Lenders Offer 100% Financing? see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers aircraft financing questions.
Question: I’m working with a broker who indicates he has lenders who will do 100% financing as long as the purchase price leaves at least 15% equity in the purchase. From looking at some of his planes he is selling with 0 down, it looks like he isn’t fibbing. Rates are fixed and vary from 4.2-4.9% (presumably based on credit score) and they are 20-year term loans with no penalties.
Is this something that can be done by most lenders or is this specific to whatever lenders he may be working with?
Answer: The short answer is no, most lenders won’t finance more than 85% of the purchase price.
Here’s the logic behind that decision. If you were to negotiate the purchase price down from $100k to $85k it really wasn’t worth $100k. That’s not to say you couldn’t turn around and potentially find a buyer for $100k, you might, especially if you were willing to spend money for marketing and were willing to wait it out for the right buyer to come along. The banks, however, know that if they had to sell the asset, they’re going to look to get out of it as expeditiously as possible and turn it into cash so they can then turn around and lend it back out. That’s why they typically require 15% down on the lesser of the purchase amount or the aircraft value amount.
More than likely in the scenario you’re discussing (where you have only slightly higher than market rates and 0% down), the broker has an agreement with their lender(s) whereby they will cover any shortfall resulting from a buyer default. This is typically done by an agreement to buy the airplane back at an agreed upon amount.
The potential bigger problem though with regard to 0% down financing is if there’s a macro event that causes the market to drop 10-20%, when you go to sell the airplane you’re likely going to be upside down in value. Which means you’ll either have to come out of pocket to sell or else keep the airplane until the situation gets better.
My advice would be to put at least 15% down to give yourself a hedge regardless of what you negotiate in purchase amount.