Aircraft Financing Options

AdamZ

AdamZ

Touchdown! Greaser!
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Adam Zucker
I was speaking with an esteemed poster on this board and the talk turned to aircraft financing. I was commenting that unlike mortgages or car loans aircraft lenders don't post or advertise their rates I find that a bit disturbing but its their money so they can do as they like.

The person I was talking to mentioned that they thought that it would be bettter to finance the aircraft through the local bank than through an aircraft financing company or big bank.

This got me to thinking about how that conversation would work. I can imagine going into one of the banks I work with and asking them to finance the new PA28 or Skylane I was ( wished is more like it) purchasing. I can imagine the Huh? WTF look on the branch asst manager's face. Then the inevitable question is it new or used, used of course and then uh ok how many miles does it have on it?

For those of you who financed who has done it through an aircraft fiance group like BOA or Airfleet Capital and who through their local bank and why.

What was your experience in getting your local bank to understand aircraft?
 
I have never gone into debt to buy a toy. Sorry Adam. Were I to do so I'd use a vehicle tied to my home's equity, like a flexible credit account or home equity loan.
 
steingar said:
I have never gone into debt to buy a toy. Sorry Adam. Were I to do so I'd use a vehicle tied to my home's equity, like a flexible credit account or home equity loan.
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There are lots of school of thought on that Michael. Some say ah use a home equity loan its deductable, the flip side is don't put your home up as collateral for a toy.

Others belive that you pay cash for it, the flip side of that argument is the opportunity cost of the money ( granted not very much these days)

And I know those whos position is I'll encumber the plane because if something major craps out the bank can have their airplane back.
 
I have asked about financing before, just never followed through. Recent rates I've heard from friends is 8%, which I found crazy. Also, consider that the loan interest will not be tax deductible. Terms were up to 20 years. Many lenders want to lend on a certain minimum amount, maybe $100k, otherwise the loan isn't worth keeping on the books. Expect a 20% down with excellent credit.

I have seen some people that really wanted a new airplane buy one and then put it on lease back. Expenses, all of them, become tax deductible if you set it up like a business. Also allows you to take losses to personal income tax. Or course you have to pay just like anyone else when you fly your own airplane.

Or if you really want an airplane perhaps a mortgage, at least the interest would be deductible. Can't say I would recommend that either.
 
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steingar said:
I have never gone into debt to buy a toy.
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:yeahthat:

That is what I plan to live by when I get out of college: just not worth all the hassle and losing your financial security over something that will depreciate or potentially end up totaled. Paying interest on top of hangar fees, insurance, maintenance, etc. just doesn't seem worth it. What if the engine craps out on the fifth hour of flight time?
 
Your local banker will probably consider financing such a thing to be an unwise risk. You should take his advise.
 
Are there any stats on people financing aircraft vs paying cash? Also, people finance and lease crazy expensive cars all the time.. do you view that just as crazy as financing an aircraft?

I remember a few years ago reading about helocs being a slight boon to homebuilt markets. With helocs all but dried up these days, are people still looking to cash out equity for an airplane vs saving cash?

Just curious how people become owners. I personally wouldn't want a payment on top of the cost of flying myself..
 
Adam, it's a depreciating asset. I personally, for myself, don't finance depreciating assets. Most bankers are risk adverse... You really will have to find a specialist that understands the market.

Sorta like lawyering or doctoring.... The GP is good for routine stuff, but you need the specialist for, well, specialties.
 
I personally didn't finance, but there are reasons to do so, such as a depreciable business asset or if it is a key piece of transportation and it needs to be reliable. I think the original question deserves some straight answers, not just "I would never finance an aircraft".
 
Walked into a bank a few years back. Banker said "With how robotic mortgages have gotten to be, I'd love to get one on the books" Told me he'd do it. I didn't go through with it. You'd be surprised. Bankers don't let good money walk out the door, and the mortgage lending is largely dictated by the feds these days so they might enjoy the opportunity to do something more than fill out a government compliance check-list. A lot of bankers are pilots too and understand the market just fine, I know a few 1 to 2 branch operations that will loan you $ on a plane... You just gotta ask. It's not as foreign to them as you might think. They do work with businesses who finance all sorts of crazy stuff, helicopters and planes being among them.
 
Alexb2000 said:
I have asked about financing before, just never followed through. Recent rates I've heard from friends is 8%, which I found crazy. Also, consider that the loan interest will not be tax deductible. Terms were up to 20 years. Many lenders want to lend on a certain minimum amount, maybe $100k, otherwise the loan isn't worth keeping on the books. Expect a 20% down with excellent credit.
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While conducting other business, and waiting for my banker to get an answer from the head office, I also inquired at my regional bank (PointBank) if they would consider financing an aircraft. I was told they would, but had answers not unlike what Alex reports: Short-ish timeline and higher than typical interest rate.

After I commented that through some of our alphabet organizations, there were lenders who would provide better terms, that got a "oh, gotcha. Well, when you're seriously ready, get a firm quote from them and we'll see if we can at least match."

So while not totally optimum, at least it wasn't a "No".

What I didn't find out yet was what insurance requirements beyond normal hull/liability they might put on top of normal to protect their interests.
 
AggieMike88 said:
While conducting other business, and waiting for my banker to get an answer from the head office, I also inquired at my regional bank (PointBank) if they would consider financing an aircraft. I was told they would, but had answers not unlike what Alex reports: Short-ish timeline and higher than typical interest rate.

After I commented that through some of our alphabet organizations, there were lenders who would provide better terms, that got a "oh, gotcha. Well, when you're seriously ready, get a firm quote from them and we'll see if we can at least match."

So while not totally optimum, at least it wasn't a "No".

What I didn't find out yet was what insurance requirements beyond normal hull/liability they might put on top of normal to protect their interests.
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The bank needs to be named as the payee (not sure what the legal jargon is on that) for the policy and they need a "Breach of Something" statement saying that in the event you do something stoooopid that's not covered under the terms of the policy, they'll still get their slice.
 
steingar said:
I have never gone into debt to buy a toy. Sorry Adam. Were I to do so I'd use a vehicle tied to my home's equity, like a flexible credit account or home equity loan.
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100% in agreement on the first part, 100% in disagreement on the second part.. but then again that is me..
 
Shepherd said:
My credit union would LOVE to finance a plane for me.
I'm not sure why.
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Probably because they can charge higher than normal interest and they would require it to be insured...
 
Bank of America has a specialised loan department for aircraft. There are also many smaller specialised financiers for aviation. I spoke to one mom and pop one based in Santa Barbara, and they were willing to finance 50% of the aircraft I was interested in for 18% interest! I did the sensible thing and declined. But I'm sure if you go to a bank affiliated specialist, you will pay less interest. Don't expect to pay just 5% down, though - they will most likely want to see a more substantial down payment.
 
additional insured and breach of warranty
bartmc said:
The bank needs to be named as the payee (not sure what the legal jargon is on that) for the policy and they need a "Breach of Something" statement saying that in the event you do something stoooopid that's not covered under the terms of the policy, they'll still get their slice.
Click to expand...
 
wsuffa said:
Adam, it's a depreciating asset. I personally, for myself, don't finance depreciating assets. Most bankers are risk adverse... You really will have to find a specialist that understands the market.

Sorta like lawyering or doctoring.... The GP is good for routine stuff, but you need the specialist for, well, specialties.
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Bill I agree. The purpose of this thread was really to find out how those that financed through local banks did so. I just find the thought of going to a local bank and trying to explain to the loan officer who thinks a Piper Cessna is a real plane why he should loan you money to buy a Trinnie.

Just to be sure I'm not financing a plane.
 
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AdamZ said:
Bill I agree. The purpose of this thread was really to find out how those that financed through local banks did so. I just find the thought of going to a local bank and trying to explain to the loan officer who thinks a Piper Cessna is a real plane why he should loan you money to buy a Trinnie.

Just to be sure I'm not financing a plane.
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All the local bankers I know fly, and the ones that don't would certainly research the subject if they thought it would expand their market.

Honestly, If I walked into a bank and got a "uuuuhhhh I dunno, we don't do that, never even thought about it" I'd probably NOT use that banker for anything else. He could at least give me a valid reason why he didn't want to (of which there are plenty) or spend 5 minutes finding a reason.

Of all the local bankers I've spoken with (most who've been my customers that I've asked out of curiosity) all have a planes and helis on the books, except one and he was open to the idea. Bankers run into a lot of folks wanting a lot of things.
 
Come on, I know many of you are business owners. There are reasons to finance depreciating assets and not all planes are toys. This thread could be informational to others in the future.
 
The aircraft loan portfolio of the bank that is best-known for such financing in Dallas has been under water since 2008, at least what's left of it. Banks are much spookier now.

bartmc said:
All the local bankers I know fly, and the ones that don't would certainly research the subject if they thought it would expand their market.

Honestly, If I walked into a bank and got a "uuuuhhhh I dunno, we don't do that, never even thought about it" I'd probably NOT use that banker for anything else. He could at least give me a valid reason why he didn't want to (of which there are plenty) or spend 5 minutes finding a reason.

Of all the local bankers I've spoken with (most who've been my customers that I've asked out of curiosity) all have a planes and helis on the books, except one and he was open to the idea. Bankers run into a lot of folks wanting a lot of things.
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wabower said:
The aircraft loan portfolio of the bank that is best-known for such financing in Dallas has been under water since 2008, at least what's left of it. Banks are much spookier now.
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Which is fine, the banker guy in the office over from mine in MT, had an entire hangar of them for sale and said he'd never do another plane loan again... Then tried to sell me one :) ALL TWINS.

One of my customers came in ( I used to write online banking software for various banks and credit unions) , and we were discussing it, he had just done a commercial loan on a helicopter the day before.

I just don't think the local guys are clueless, and the ones who are would probably be open to it, until they found out the truth.
 
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I think the last deal I worked that involved financing was a Citation III in 2002. Everybody else has used whip-out.

bartmc said:
Which is fine, the banker guy in the office over from mine in MT, had an entire hangar of them for sale and said he'd never do another plane loan again... Then tried to sell me one :) ALL TWINS.

One of my customers came in ( I used to write online banking software for various banks and credit unions) , and we were discussing it, he had just done a commercial loan on a helicopter the day before.

I just don't think the local guys are clueless, and the ones who are would probably be open to it, until they found out the truth.
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Actually, when I financed my plane (admittedly over a decade ago), I found the rates offered were about the same as you could get on standard car loan deals (not talking about the subsidized deals from the manufacturers).
 
John221us said:
Come on, I know many of you are business owners. There are reasons to finance depreciating assets and not all planes are toys. This thread could be informational to others in the future.
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It's entirely different for a business asset that generates income and has a reasonable ROI. Aside from revenue generation that (hopefully) exceeds the full-on asset cost, there are tax advantages that an individual doesn't get.

For a business, it's like any other investment (and analyzed as such). For an individual, it's a hobby (and is considered a "rich boy's toy" by the government for tax purposes).
 
Are people who buy 500k Cessna 400s and Cirrus Sr22's paying cash or taking out a loan?
 
It doesn't matter whether the taxpayer is an individual or artificial entity, the use of the plane determines the tax treatment. If an individual leases a plane or use it for business purposes, he/she is entitled to the same tax treatment as a corp, LLC or any other owner. I've personally owned all or part of 30-odd planes over the years, all but a few of which (PA-17 Vagabond, Taylorcraft L2, couple of other tail-draggers) were 100% business use and classified as such for both book and tax purposes.

The depreciation rules for planes that are part business and part pleasure are tricky, and the tax audits that may or may not occur (I've had about a dozen without incident or additional tax due) can also be problematic if you're not careful re record-keeping and compliance with both FAA and IRS regs.

Worth noting is that tax depreciation for airplanes is really a cost recovery tool rather than a recognition of decreasing value, at least for most periods of ownership other than 2008-2012. Effective useful lives of less than 5 years are possible through the use of accelerated depreciation and expensing, but the risks of such use are significant if the asset is highly leveraged using long-term financing.

When I bought the first two planes I didn't have sufficient cash reserves to pay for them without depleting the kitty, so I financed them with local banks. After that, all cash. A careful analysis might have shown that I could have made a few basis points by financing them, but the comfort of knowing they were paid for outweighed whatever financial benefit I could have gained.

wsuffa said:
It's entirely different for a business asset that generates income and has a reasonable ROI. Aside from revenue generation that (hopefully) exceeds the full-on asset cost, there are tax advantages that an individual doesn't get.

For a business, it's like any other investment (and analyzed as such). For an individual, it's a hobby (and is considered a "rich boy's toy" by the government for tax purposes).
Click to expand...
 
skidoo said:
Probably because they can charge higher than normal interest and they would require it to be insured...
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Actually their rates are really good. Which makes it even worse.
I don't have the nerve to pursue the discussion with them. It might turn into a serious case of A.I.D.S. which is always financially ruinous.

Glenn
 
supernovae said:
Are people who buy 500k Cessna 400s and Cirrus Sr22's paying cash or taking out a loan?
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I've seen 3 or so bank repo'd 20's and 22's come through my airport within the past 6 months, so there's loans involved. Although there are a few higher end 22T's I know of there that were paid for in cash.

The only way I'd be able to buy the plane I want (Piper Dakota) would be to finance, so I'll probably never have one.
 
I agree with the "never borrow money to buy a toy" crowd. If you don't have the discipline to save and pay cash, you would be better off financially just renting a plane as you go. I'm sure Dave Ramsey would agree with us.
 
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wabower said:
Worth noting is that tax depreciation for airplanes is really a cost recovery tool rather than a recognition of decreasing value, at least for most periods of ownership other than 2008-2012.
Click to expand...

I like reading Wayne's posts for little pearls like that.....

If there was any period where actual depreciation gave accelerated depreciation a run for its money, it was the period he mentions :D
 
Ya, you put it better than I did.

My intent was that *if* the plane was a business tool, it generally would be considered to have some kind of ROI regardless of ownership structure. If it were purchased as a "hobby" or "individual/non-business" use, then it's treated differently.

Depreciation is an artificial way of allocating the expense of the asset over time... as you note, for the last few years it may even represent loss of value. The asset may not really be worth zero at the end, but would in theory (or practice) require expenditures to keep it in similar condition to the way it was when purchased.

wabower said:
It doesn't matter whether the taxpayer is an individual or artificial entity, the use of the plane determines the tax treatment. If an individual leases a plane or use it for business purposes, he/she is entitled to the same tax treatment as a corp, LLC or any other owner. I've personally owned all or part of 30-odd planes over the years, all but a few of which (PA-17 Vagabond, Taylorcraft L2, couple of other tail-draggers) were 100% business use and classified as such for both book and tax purposes.

The depreciation rules for planes that are part business and part pleasure are tricky, and the tax audits that may or may not occur (I've had about a dozen without incident or additional tax due) can also be problematic if you're not careful re record-keeping and compliance with both FAA and IRS regs.

Worth noting is that tax depreciation for airplanes is really a cost recovery tool rather than a recognition of decreasing value, at least for most periods of ownership other than 2008-2012. Effective useful lives of less than 5 years are possible through the use of accelerated depreciation and expensing, but the risks of such use are significant if the asset is highly leveraged using long-term financing.

When I bought the first two planes I didn't have sufficient cash reserves to pay for them without depleting the kitty, so I financed them with local banks. After that, all cash. A careful analysis might have shown that I could have made a few basis points by financing them, but the comfort of knowing they were paid for outweighed whatever financial benefit I could have gained.
Click to expand...
 
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