An Overview of Aircraft Loan Structures see more
NAFA member Adam Meredith, President of AOPA Aviation Finance Company, discusses how to determine which aircraft loan package is right for you.
The best way for an AOPA Finance expert to determine the right loan package for its members is to ask them the right questions, starting with, “What’s important to you?”
Most have the same answer: “The lowest interest rate possible.” From experience, we know they really mean “lowest rate possible for their specific situation”. Three questions help us frame their specific situation:
- What have you budgeted for a monthly payment?
- How long do you want to own this plane (and keep financing in place)?
- How much are you looking to put down?
How the member answers determines whether a fixed, floating or a hybrid financing structure fits best. Their financial complexity might require us to recommend an asset-based approach.
A fully amortized, fixed rate loan with the longest possible term might be ideal for somebody intending to own the plane for a decade or more. The risk is the interest rate locked in at the beginning of the term might be higher than the going interest rate at the end. But the trade-off in peace of mind knowing the guaranteed monthly note is compatible with one’s long-term spending plan makes the extra cost worthwhile. For example, for non-commercial use, there are lenders who will execute fully amortizing, fixed-rate loans with 15 or 20-year terms for turboprops still in production.
When it comes to length of ownership, many of our clients answer, "about ten years.” Data AOPA Finance has collected shows the typical length of ownership is actually no more than five. That's why floating, balloon or adjustable rate (ARM) loan structuring might make more sense.
A floating rate loan has no fixed interest rate, while an adjustable rate (ARM) loan starts out fixed but then changes (to either a new fixed rate or a floating rate). Following the initial period, an ARM floats, based on a benchmark reference rate like the Federal Home Loan Bank (FHLB). The initial period is typically three to five years. Another term for an ARM is hybrid. In the current interest rate environment and forecasting into the foreseeable future, these financing packages can offer better savings compared to fixed rates with similar amortizations.
Balloons are another option; however, the amortization period is longer than the actual loan term. An example might be financing a turboprop on a five-year term with a "balloon" and a 15 to 20-year amortization. That package might work best for members who a.) are looking purely for the lowest rate possible, and b.) know they’re going to own the aircraft (and/or keep the loan) less time than the normal average.
Balloons allow the borrower to delay paying the principal until the very end, thus keeping the monthly outlay low. At the end of the term, the entire unpaid balance comes due. That small monthly note balloons into one large final payment.
Sometimes members come to us comfortable with the complex structures of floating or ARM financing, but the complexity of their own finances prohibits them from using those options. Take for example, a real estate entrepreneur who owns 30 different properties. Each property is a separate ownership entity. They have partners on some of these properties and are a majority owner, or half owner or some variation of percentage, across the entire real estate portfolio. Despite the positive cash flow, there are lenders who will not do a deal without them putting a guarantee on all the entities they have equity in, as well as a personal guarantee from themselves. Even if they aren’t restricted by covenants from doing so, the cost in money and time is frequently not worth it. The financial complexity surrounding their business might mandate a simpler, asset-based loan configuration.
In fact, asset-based deals can be further simplified if the client can increase their down payment. The more you put down up front, the more options lenders have available. A loan on an older airplane or one with higher-time engines becomes doable if the borrower can afford a higher down payment. Whereas a newer plane might be approved with a 15% down, 20-year amortization, the same situation for an older turboprop might go from “no deal” to “deal” with 30% or 40% down. Likewise, a relatively mainstream turboprop that has been produced in significant numbers might normally see a 15-year amortization. Without a larger down payment, older or rarer turboprops might cause lenders to shorten the amortization period, or even refuse to make the loan.
Jet financing has its own unique requirements which might also necessitate a higher down payment. That’s because the frequency of engine advancements and avionics upgrades as well as new products tend to render those aircraft obsolete faster than others. That’s why asking the right questions of our members allows AOPA Finance to give them the best picture when it comes to securing the best financing package for their unique situation.
This article was originally published by AOPA Aviation Finance Company on April 12, 2019.
The Airplane Acquisition Checklist Series: Part One: The Pre-Purchase see more
NAFA member Adam Meredith, President of AOPA Aviation Finance Company, shares his pre-purchase airplane acquisition checklist.
Did you resolve to upgrade your current aircraft or to buy your first airplane in 2019? Congratulations!. With low inventory and high demand, how you approach the buying process may be the difference between getting your first-choice or settling for an also-ran.
Buying an airplane is like flying an airplane. It’s all about planning, crew resource management and checklists. Your “crew” includes your lender, your insurer, your maintenance contractor and AOPA’s Aviation Finance Group. AOPA Finance can match you with the right lender, and our extensive experience can also provide you the additional leverage you may need in a tight market, at no cost to you.
Like flying, how well you plan, manage your crew and follow your checklists help determine how well the purchase process goes. We’re not talking about pre-flight, flight and post-flight checklists, though. We mean these checklists:
3. Aircraft Delivery
Let’s start with the Pre-purchase Checklist:
• Ownership—personally or through a company or LLC?
• Use—personal or commercial?
• Loan Pre-approval
• Private hangar or shared?
• Aircraft maintenance contractor
Ownership. Are you going to own the airplane yourself or through your company? Will you create an LLC, a partnership or some other type of corporate body? Iron out those details first. They guide which lender can pre-approve you and may also influence the length of the pre-approval process. There are advantages and disadvantages to all ownership scenarios. What’s important to know is that if you decide to change structure at the last minute, it’s a bit like telling your building contractor you want to move a door. At a minimum you know there’s going to be delays in the process and it may completely change the structure.
We’ve seen too many situations where potential buyers got a loan pre-approval based on one ownership scenario (like a partnership), only for them to change the scenario (like dissolving the partnership). That kind of change will negate the pre-approval process and will force the buyer to start over. It may also necessitate finding a different lender.
Use—Personal or Commercial? Part 91 transport for you alone, for your company’s employees or leaseback to the local flight school? Decide how you intend to fly your aircraft and commit to it. There is no advantage in telling your prospective lender and insurer it’s for personal use, only to conduct commercial operations once purchased. Should the discrepancy come to light because of an accident, incident or investigation, it could trigger a steep default interest rate, or worse. Transparent communication is the best way to keep this complex transaction simple.
Now it’s time for:
Loan Pre-Approval. Getting pre-approved confirms what you can afford and enables you to move quickly on an aircraft, both essential in this seller’s market.
Some think it’s a waste of time to get pre-approved because the pre-approval is time-limited. True, pre-approval is good for anywhere from 60 to 90 days, depending on the lender. That’s generally enough time to find the right aircraft. But, if the search period does exceed the pre-approval timeframe, it may be possible to extend the pre-approval period.
Even if the lender won’t extend, re-approval is quicker than an initial pre-approval. So you’re still ahead of the competition.
While waiting on pre-approval, finish the rest of the checklist:
Escrow. Have cash ready to put in an escrow account. Escrow gives you an exclusive option on an aircraft within a specific timeframe. When entering escrow, ask for generous restrictions. The more time you can negotiate, the better. It gives your lender, insurer or AOPA Finance space to conduct background checks, damage history and title searches. Also consider keeping extra money in reserve to add to escrow should the seller require an additional incentive.
Next time: The Purchase and Aircraft Delivery checklist.
This article was originally published by AOPA Aviation Finance Company on February 21, 2019.
Is it possible to prepay my aircraft loan? Adam answers. see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers questions about prepaying your aircraft loan.
Question: I have been looking at several Bonanzas, but every time I start negotiations with the seller, they opt for cash buyers. Is there something I can do to get the financing in place before I negotiate the sale?
Answer: If you have an age range and purchase price in mind, it would be recommended to get pre-approved. The pre-approval will take care of the credit underwriting so that when you find an aircraft you can confidently make an offer. Closing can be completed within a few days upon signing a purchase agreement if a pre-approval is already in place. Approvals are typically valid for 90 days with the rates locked for the first 30 days.
If you are ready to get pre-approved, please call us at 800.627.5263 and we can send you an online application to get started.
Question: Is it possible to prepay my loan?
Answer: Some lenders do have pre-payment penalties but still allow additional principal payments to be made. Typically, the pre-payment penalty is only for the first 24 months of the loan and runs about 1-1.25% of the original loan balance. Additional principal payments can be made during the time that the pre-payment penalty is in place as long as the payments are within the specific lenders’ guidelines.
Don’t feel shy about having aircraft financing questions. It is a complicated process, and asking questions is the first step towards understanding it better. Call us if you ever have questions about the financing process, 800.627.5263.
Have questions for Adam? He is happy to answer them. Submit your questions here. Great rates. Great terms. Helpful and responsive reps. Three good reasons to turn to AOPA Aviation Finance when you are buying an airplane. If you need a dependable source of financing with people who are on your side, just call 800.62.PLANE (75263) or click here to request a quote.
This article was originally published in AOPA Finance's August edition of "Adam Answers" on August 22, 2018.
The five things you need to tell your finance broker to save you money see more
NAFA member and President of AOPA Aviation Finance Company, Adam Meredith, shares what you need to tell your finance broker to save you money.
Our goal is to save you as much money in interest rate and loan fees as possible. In order to best do that we need answers to the following 5 questions.
How will you own it?
Who is going to own the plane? Is it going to be a sole-purpose limited liability company you establish? That information is needed in advance to correctly fill out the loan documentation. Are you going to have multiple co-owners? Some lenders won’t even deal with an aircraft that has multiple partners, others limit how many partners they’ll accept. We don’t want to waste our time or yours by contacting lenders who could be eliminated in advance.
How will you use it?
If the aircraft is going to be used to generate revenue, there are specialized lenders that prefer these types of loans and are more willing to lend money. Revenue generating aircraft are often referred to as “essential use” aircraft. Some of these include aircraft used in charter operations, helicopter tours, pipeline patrol, and parachute jumping. In general, if your plans entail essential use on your aircraft, there may be fewer lenders willing to give you a loan. Tell us right away if that is what you intend. Likewise, if you want to use the aircraft for flight training, in a Flying Club or on leaseback, these all also fall into the “essential-use” category and thus require specialized options.
How long will you keep it?
How long do you plan to keep it? Most of our customers have their aircraft less than 4-5 years. If that is your intent, you may want to consider an adjustable-rate loan or vs. a fixed-rate loan. An adjustable rate loan can save you money. Here’s an example: let’s say you want a $500,000 loan. If you went with an adjustable-rate loan (fixed for the first five years, then adjusting annually) you could save nearly $14,000 in interest over the course of those five years compared to a 20-year fixed-rate loan.
Any past problems?
Tell us up front if there have been any past credit issues. Were there past disputes or bankruptcies? Insurance companies using heavy-handed tactics? Don’t just hope it won’t be uncovered during the course of the loan application, because it will eventually be uncovered. You’re far better off having the discussion of any past problems at the start of the application process rather than explaining after the fact.
How do you make your money?
We need to be able to explain to a lender what your cash flow looks like. The end-of-year results may be good, but did the cash come in lumps? Is it dependent on the seasons, or whenever you happen to buy and sell a company? Do you get paid a commission only when you make a sale? Do you plan to retire? Many of our members are small-business owners who may have irregular cash flow but high annual income. It’s helpful if we know in advance so we can make the best possible case to a lender.
Considering aircraft ownership? AOPA Aviation Finance will make your purchase experience as smooth as possible. For information about aircraft financing, please visit www.aopafinance.com or call 1-800-62-PLANE (75263).
This article was originally published in AOPA Finance on August 1, 2018.