What are the benefits to refinancing an aircraft loan?
Reasons to refinance an aircraft loan
- Obtain a lower interest rate
- Lower monthly payment
- Extend loan term
- Avoid balloon payments
- Finance upgrades to aircraft
Interest rates are at historic lows, and it’s no surprise that many people choose to take advantage by refinancing their existing loans. Though many people do just that by refinancing their mortgages or auto loans, aircraft owners may not think to refinance their aircraft loans. Doing so, however, can yield numerous benefits depending on your financial goals, such as obtaining a lower interest rate or lower monthly payments.
If an aircraft loan refinance sounds like a good idea, consider the following factors to help you decide whether an aircraft refinance is right for you.
Why refinance an aircraft loan?
Why should you refinance your aircraft loan? Besides the most obvious reason — getting a lower interest rate — there are equally valid, if less obvious, benefits. Some of the primary reasons one may want to refinance their aircraft loan include:
- Lower your interest rate. Perhaps the most obvious reason to refinance an aircraft loan, if you’re able to find a lender offering a lower interest rate than the rate on your current loan, refinancing could save you a significant amount of money over the life of the loan.
- Lower your monthly payment. Even if the interest rate remains relatively unchanged, if you’ve already paid off a significant portion of the original loan, refinancing the remaining amount could get you a lower monthly payment, which can free up money for other expenses.
- Extend your loan term. Refinancing an aircraft loan can allow you to extend the term of the loan, giving you more time to pay it off. Often this results in a lower monthly payment, but sometimes it just helps knowing you have more time to pay off the loan. Be aware, however, that extending the loan term usually means you’ll end up paying more in interest over the life of the loan.
- Avoid balloon payments. Some aircraft loans have what’s called a balloon payment at the end of the loan term. A balloon payment is the final amount due in one large payment — typically much larger than the monthly payments the borrower had been making. For borrowers who have a tough time making the balloon payment, refinancing can be a way to spread the remaining balance over a new loan term.
- Upgrade the aircraft. Some refinancing programs can help you use equity to finance upgrades to your plane, such as an engine overhaul or new avionics equipment.
The first step of refinancing an aircraft loan should be to compare lenders to see if any of them can offer you more attractive rates and terms than your current loan. Be sure to read the fine print before signing a loan agreement; origination fees and other costs could negate whatever financial benefit you might receive from a lower interest rate.
Be sure to check the terms of your current loan as well. Some lenders charge a prepayment penalty if you pay off the loan early. When you refinance a loan, you’re doing just that — using the new loan to pay off the old one early. Check to see if your current lender will charge you a prepayment penalty — and while you’re at it, it’s not a bad idea to make sure your new lender doesn’t charge a prepayment penalty either.