What you should know before purchasing a new or used airplane
The basics of airplane financing
- Decide whether purchasing or leasing is best for you.
- A new airplane costs more, but may have more financing options than a used plane.
- Loan terms are commonly seven to 20 years, depending on borrower credit scores.
- Obtain preapproval from a lender to help during the purchase process.
- Consider hiring a broker to help with negotiations.
Whether you love the thrill of flying and devote your spare time to cruising the skies, or you’re a busy businessperson who needs a convenient mode of travel, you may be looking to purchase an airplane.
There are many things to consider before committing to an aircraft purchase loan. To get the best deal on the right airplane, think things through, regardless of whether the bulk of your flight time will be for pleasure or work-related.
Rent or buy?
How frequently you fly is an important initial factor in deciding whether to purchase an airplane. If you’re in the air only once or twice per month, for example, leasing a plane may be a more cost-effective strategy. Be wary of purchasing with the idea that it’ll make you fly more often — in many cases, it doesn’t. And think about how much space you’ll need. If you don’t need room to carry business associates or family members, downsizing your purchase or sticking with a leased aircraft may be the smart option.
If you like the convenience of ownership but want to reduce your costs, consider a co-ownership structure in which you share the loan payments and maintenance responsibilities with one or more parties. The cost savings may offset the fact that you will have to share flight time with the other owners. Additionally, look at the availability of and options for renting an aircraft at your local airport. If there isn’t much to choose from, this could be the tipping point toward a purchase.
Lastly, consider joining an ownership group. These groups are valuable sources of information for obtaining financing or understanding the features of a particular airplane. Major manufacturers such as Bonanza, Cessna, Cirrus and Piper have ownership groups that offer detailed online resources.
New or used?
You might save money upfront by purchasing a used airplane, but a new model may allow you to pay a lower interest rate as manufacturers often subsidize financing. You may also be able to obtain a longer loan term to reduce your monthly payments and receive some tax benefits. New airplanes typically include a warranty, which can reduce maintenance or repair costs over the first few years of a loan.
Know your financial limits. For example, if you have $1,000 a month to commit to loan payments and maintenance costs, don’t exceed that amount. You may find your dream plane for a $1,000 monthly payment, but all additional expenses and maintenance goes above and beyond that. Get preapproved financing before you go shopping, so you know how much you can spend. It’s possible that a used aircraft may be your best bet, based on your budget.
Take a test flight and pay attention to the power settings, speed and fuel efficiency, then compare it to the manufacturer’s published data. Also, remember that you’ll pay more for a faster aircraft. If your flights tend to be shorter, around 300 nautical miles or less, you may not save much time, but a faster plane could cost 20 to 30 percent more.
A lender may offer an aircraft loan term that ranges from two to seven years, with interest rates that rise as the term and amount increase. For example, you may pay 3.5 percent interest on a 24-month loan of $25,000 and 8.5 percent on an 84-month loan of $100,000. The loan may feature simple, fixed-rate interest with no annual fees or prepayment penalties.
To obtain preapproved financing, a lender may require a signed application, your last two federal tax returns and W-2 forms for income verification, and a current pay stub. If you are self-employed, you may need your business’ tax returns for the past two years, a current balance sheet, details on any outstanding debts and their associated monthly payments, and an explanation of what your business does.
A lender may offer a preapproval that is good for 90 days, giving you additional time to shop around. There may be restrictions on the types of aircraft you can finance. Some lenders may only work with traditional piston-powered or turbine-powered airplanes, or they may branch into standard, kit and experimental models, as well as financing for significant upgrades or overhauls on used models.
Credit standards may be more rigid for aircraft than other loan types. You may need a credit score of 700 or higher to qualify for the best products, such as a 20-year loan with a 5 percent interest rate. There may be a required down payment of 10 percent to 15 percent or more.
Some lenders may have asset-based, nonrecourse loan programs, meaning the lender can only repossess the aircraft and may not pursue any other personal assets in the event of a default. Some lenders will finance up to 100 percent of the costs, and the loan may include an interest-only payment period, or a lender may waive the need for financial statements or tax returns. You will likely pay higher interest rates for these products, however.
Finally, consider using a broker when purchasing an aircraft. This can be a valuable timesaver as a broker will likely have more knowledge about specific manufacturers, models and pricing. A broker can help you negotiate as well as alert you to any fees or delays in the delivery process.