How to Tell if Your Aircraft Finance Deal is Fair

Aviation lending is considered a specialty in the banking industry. And, since not all banks offer the service to their clients, loans vary in terms of how favorable they are – but they are almost always structured to mitigate risk for the lender.

“This means banks include covenants, clauses, interest rates, and terms that are favorable to the lender until the note has been repaid,” Chris Lee, President of the Aircraft Division at 1st Source Bank says.

Still, “competition in the marketplace helps to keep the general terms of many deals fairly close to one another”.

There are a range of factors that could influence a bank’s ability to offer favorable loans to individuals or businesses, Lee adds. A good bank will evaluate each aviation finance deal individually, based on many factors. Some deals are more attractive to banks than others. 

Aircraft usage is important, he says, because some aircraft loans are made for Part 135 commercial uses while others are for personal and business transport (Part 91).

On top of this, there are factors that are common for essentially any financing deal, not just aviation. For example, the applicant’s credit score will have an impact, as will income and employment history, debt-to-income ratio, loan-to-value ratio, and any collateral involved.

And Lee highlights more qualitative factors, such as the customer’s history with the bank. “Existing customers with a history of responsible banking may receive better terms or discounted rates,” he says, additionally pointing to economic factors such as the central bank’s interest rate or the industry/sector involved.

“For business loans, the industry's stability and growth potential may impact the terms offered by banks,” Lee says.

Ultimately, with aircraft lending the price is what you pay, but value is what you get, he argues. If you narrow your focus to the quoted rate alone, you may pay for it later in areas you overlooked.

A basic litmus test is to ascertain how long the lender has been providing the service. “The adage ‘if it was easy everyone would be doing it’ applies here,” Lee warns. “Because of the inherent complexities of aircraft lending, it demands attention to nuanced parts of the transaction while serving to self-select uncommitted parties from staying in the industry for long periods, due to losses they sustain.”

Looking for aircraft finance expertise? Check out three tips when financing a business jet

Aircraft Finance Lenders are Risk-Averse (Generally)

Brian Macbean, Director of Credit and Sales at AOPA Aviation Finance notes that when a lender perceives a high level of risk on a loan, the structure of the loan will likely be adjusted to account for it.

“The main factors that contribute to this risk evaluation are credit and collateral. The stronger the credit (income, liquidity, and credit experience of the borrower), the more likely it is that a lender will be comfortable with a less restrictive loan structure,” he says.

“If the aircraft is relatively new, has low times, is in good condition, and the intended use is in line with the lender’s guidelines, the loan will be structured in a favorable way.”

Lenders have a cost of funds that they must consider when making a loan offer, so there is only so much room to adjust the rate before the lender starts losing money.

“For strong borrowers with good collateral, there is a possibility for the lender to come in lower than their standard rate,” Macbean says. “Oftentimes a larger down payment or a shorter amortization can have a positive effect on the available rate.”

A broker like AOPA Aviation Finance can help operators compare a wide range of offers, he highlights, helping to find the best structure.

“We can assess the current market conditions and compare available options to make sure the borrower is getting the best deal possible,” Macbean assures. “Comparison to the market is the best way to determine the competitiveness of a loan offer.”

Preston Holland, Chief Commercial Officer at FLYING Finance, notes that banks make a spread over some sort of index, whether it is WSJ Prime or the Secured Overnight Financing Rate (SOFR).

“It's not a secret how much money the lender is making as a spread, and it all boils down to credit risk, asset risk, and the amount of equity being put into the deal,” he says.

“For instance, if a buyer is coming to the table with 50% of the purchase price and the bank is advancing 50% of the purchase price, the rate may be lower because the asset risk for the bank is lower. In the event of a default, the bank will be able to recoup its equity in the deal relatively easily.”

Defining a Good Aircraft Financing Deal

A spokesperson for the National Aircraft Finance Association (NAFA) says it is hard to define a ‘good deal’, because it could mean different things to different people. For example, one school of thought could see the lowest loan payment possible as the best deal. But from another perspective, such low payments might require longer amortizations, meaning the loan pays down at a slower rate.

“This has two main effects,” the spokesperson says. “First, the borrower actually pays more interest over time. Second, they are at a higher chance of being ‘upside down’ in the loan, meaning the borrower owes more on the aircraft note than the aircraft itself is worth.”

The NAFA spokesperson says a good deal should be fair to all parties involved, which infers a good line of communication and understanding of one another’s interests and needs.

“The math behind a ‘good deal’ isn’t necessarily the terms itself, it’s who the borrower is working with,” the spokesperson notes. NAFA member finance institutions offer the best opportunity for borrowers to achieve a good and fair deal, they add. “Experience in the industry is vital, as is trust in your lending institution.”

How to Avoid a Skewed Aircraft Financing Deal

Tristan Brouard, Associate Vice President, Asset Management at ACC Aviation says operators should watch out for high fees, mismatched repayment schedules, restrictive covenants, and harsh penalties as potential signs of a skewed deal.

“Consulting with experts and comparing offers can help ensure alignment with financial goals and industry standards,” Brouard adds.

He outlines some key steps for operators to follow to ensure a fair finance deal. First, borrowers must know their own finances, understanding their situation thoroughly, including income, expenses and assets. Then they must research their various options, seek expert advice, and review documents carefully, clarifying any terms they don’t understand.

On top of this, borrowers shouldn’t hesitate to negotiate terms with lenders to secure better rates, fees or repayment terms, and they should consider full costs (including areas like insurance and maintenance), and build relationships with finance providers.

“Cultivate strong relationships with lenders to potentially enhance future financing opportunities,” says Brouard.

Holland says that as an aircraft finance broker, FLYING Finance advises borrowers to contact someone who can understand the terms they’re seeking and take it to market to get competitive bids.

A capitalistic economy has created the conditions for prospective owners to be able to purchase the aircraft in the first place, he notes. “My advice is apply that same principle of capitalism to your aircraft loan. Especially those looking to purchase an aircraft that is less than 10 years old and an in-demand model, the demand for that loan exists at multiple banks.

“Shop the rate to create a spirit of competition, because the law of capitalism says that it is ultimately best for the consumer,” he concludes.

More information from:
1st Source Bank: www.1stsource.com/aircraft
ACC Aviation: www.accaviation.com
AOPA Aviation Finance: https://finance.aopa.org
FLYING Finance: https://flyingfinance.com
National Aircraft Finance Association: www.nafa.aero