Aircraft lending is its own niche in the financial industry. That means previous experience with financing big-ticket items like houses and expensive cars is only marginally helpful when you step into aircraft financing. So forget what you think you knew about aircraft financing, starting with these three myths.
1. Financing a $100,000 airplane is as quick and easy as financing a $60,000 car.
When you step onto a car lot ready to buy a car, you can generally expect to drive your new wheels home that day, financing in place and title in hand. Not so with an airplane. Even though the values may be nearly comparable, the underwriting process of financing an airplane is much more akin to a house than a car. To understand why, think about what the underwriter is putting on the line.
Every year millions of Americans buy a new car, so the secondhand market is big and active. Car values are well known, and most cars move quite quickly. By contrast, airplanes take longer to sell, their values aren’t as predictable, and perhaps most importantly, the process to repossess one is costly. Add in the fact that there may be expensive maintenance to attend to, missing logbooks, and so on that will impact the value of the repossessed asset. Bottom line: if you can’t pay your loan and the bank must take the airplane, they assume more financial risk than they would with a car. As a result they make certain at the beginning of the process that you are a qualified candidate.
Expect at least two weeks and more typically a month for the full financing process. In this tight used market, getting pre-approved for a loan will put you in a position to act quickly when you find the right airplane, and the seller can be sure the deal will go through, absent any major issues with the pre-purchase inspection.
2. It’s always cheaper to pay cash.
No doubt your parents instilled in you the financial wisdom to avoid financing charges at all costs. That can be good advice, but not always. Let’s say the market is strong, as it has been the past few years, and you have $100,000 ready to invest in an airplane. You could empty the bank account and avoid financing charges, thereby saving yourself a few percent on your money. Or you could finance the airplane and invest the money. With strong market returns you may be making more with your investment than you’re spending in financing. The challenge is that you have to be able to afford the cash flow, as getting overleveraged is dangerous and could force you to sell assets, typically at the worst time. Working with a knowledgeable financial advisor will help nail down what’s right for you.
3. I know who the seller is and therefore don’t need to do a title search.
OK, fine. You truly know the seller and you trust her. That’s great. But are you sure she did a title search when the aircraft was purchased? And are you sure there isn’t an errant state tax lien wrongly filed on the title? Of course you’re not. We know when we are purchasing an airplane that expensive days are ahead, so some of us try to skimp a little on costs that might not seem as critical. But there is no cheaper insurance than getting a title search, even on an airplane you’re familiar with from a seller you know and trust. It’s not at all uncommon for taxing agencies to incorrectly asses liens without the owner ever knowing. A lender will require it, but even if you’re paying cash, it’s worth it to spend a few bucks to check the title before the deal closes.
Have a question or need help financing your next airplane? Contact the experts at AOPA Aviation Finance at 1-800-627-5263.