It’s in the Bank
Having fallen in love with the idea of owning your own aircraft and having already planned your first sojourn together, the vexing question of how to pay for said love affair rears its ugly head.
For most of us, the option of simply handing over a wad of the folding stuff is beyond reasonable. This draws us to finance of some sort. Assuming that you have declined to extend your mortgage on the family home and decided to keep the peace with your partner by maintaining all costs associated with that damn aircraft as a separate expense, you now go cap in hand to your bank.
Enter the humble suburban finance broker. In just the same way that you can finance a car with a number of bank and non-bank lenders, options do exist for aircraft finance. In most cases, the lender will consider the aircraft as sufficient security for the transaction and provided you can demonstrate an adequate capacity to service the debt you can borrow up to 100% of the purchase price. This has altered somewhat since the downturn with valuations tending towards the ultra-conservative side. However, stick to your guns and battle those big, bad bankers for your dream.
A finance and leasing specialist is often best placed to support you in representing your case to multiple lenders to ensure that you get the best terms available for the finance of your aircraft.
As aircraft finance contracts are written on fixed rate terms, the monthly cost of ownership is predictable. As well as being predictable, it rolls on regardless of whether you fly or not, even if the aircraft is grounded in maintenance. That being said, the key to successful management of your finance account is to know your budget and stick to terms that give payments within it. Consult your broker to discuss how to best structure the contract length and residual value to accommodate your monthly budget.
Another pitfall for first time buyers is the assumption that you can easily extend your loan facility to cover things like avionics upgrades, engine replacements and new paint and interior.
Whilst these things will almost always add value to your aircraft, financiers will view the transaction as a new facility and, in many cases, ask you to finalise your existing account and begin a new loan incorporating the increase. This carries at least three traps for young players. Firstly, you need to re-apply and will often be subject to the same credit criteria as your first application. Depending on the time between the first and second application, you may have to show updated financial information. The second trap is that you are now obliged to start the interest cycle again. As these contracts are structured in such a way that the financier collects the bulk of interest in the early part of the loan, this could be an expensive experience. The third and often overlooked issue is that many financiers charge penalties for early termination of the loan.
Depending on how far advanced your contract is, this could be a significant cost.
The key to minimizing your cost here is to ensure that the aircraft you buy today is as close to how you want it to be as a finished product. Alternatively, be prepared to pay cash for upgrades after purchase.