How to Pay for an Airplane

There comes a time in most pilots' lives when they're faced with a tough decision: continue renting an airplane from a local flight school or club, or buy one of their own. Maybe there's a sweet little bird you've had your eye on already. You've chatted with the insurance agent, you've looked into hangar or tie-down costs and you've even convinced your spouse that your need for an airplane is as crucial to your survival as the air you breathe.

OK, maybe I exaggerated a bit on that last part, but I remember well when my first airplane called to me at Chicago’s Sky Harbor Airport. It was a 1967 7ECA Citabria — that’s “airbatic” spelled backward — that I stumbled upon sitting all alone in the grass one day. It was love at first sight, despite a few warts here and there, such as a sloppy re-paint job and a couple of worn tires. Now, decades later, I don’t even remember the asking price. What I do recall was the owner asking if I’d be paying cash or financing. That’s when I realized I’d given the money part about as much thought as I might have about paying for a fancy dinner on the first date with the lady of my dreams … almost none at all.

Jumping ahead a few decades, the good news about buying an airplane is that with an abundance of relatively low-interest loan rates and the near-instantaneous communication made possible by the internet, financing an airplane today is a little more complicated than buying a car — but not much.

Buyers can always pay cash, of course. Dave Coleman sells airplanes for Duncan Aviation and offered a peek behind the curtains of the decision process. “Financing can be a bit counterintuitive. As finance rates go up, more people seem to finance. As rates drop, people pay cash, because people with plenty of money don’t need financing. They only finance as part of an overall wealth-management strategy. When rates are low there are fewer places to invest, so people pay cash for their airplane. When rates are high, there are more investment opportunities, so they invest their money and finance their aircraft.”

For many pilots, financing makes the most sense. Funds availability made the decision for Max Spivak to finance his two aircraft. “I looked around online and came to Air Fleet Capital. Their rate was in the low 5 percent range. He remembers searching online for other financing and was offered money, but at “two to three points higher.” Sal Marinello said “the financing stage of his aircraft was not that big a deal and required just three phone calls,” once a friend connected him with a broker he liked.

The key to a successful aircraft loan is making certain you have your ducks in a row before you make the first call to arrange financing. Most brokers Flying spoke with suggested getting preapproved for the loan, an effort that demands a serious look at your personal finances, as well as those of your company if the airplane won’t be personally owned. Arthur Gunn is a CPA in the Chicagoland area and suggests making sure you also have “electronic copies of your last three months’ worth of bank statements, all pages, your W2s and two years of back tax returns.” He said the upfront work made purchasing his 2006 Cirrus SR22 with Dorr Aviation Credit Corporation move smoothly.

Consider the amount of debt you’re already carrying. Wally Zook owns Zook Air, an aircraft finance brokerage company. He said, “Once your personal debt-to-income ratio reaches 32 percent, many banks may simply refuse the loan.” He added that loans of less than $50,000 on an old airplane might receive a thumbs down despite the buyer’s financial picture. “That makes it really difficult for older and experimental aircraft.”

At Air Fleet Capital, President Steve Smestad said, “Generally, the [aircraft] age isn’t an issue, but rather the dollar amount of the loan. We loan as little as $56,000 and work with a bank that will do loans down to $25,000. There are always exceptions.”

Another must have for any lending institution is a prebuy inspection from a reputable shop. Here, reputable means not using the same shop as the seller to prevent any potential bias that could oversee problems that a new owner might want to know about, issues the current owner might have learned to live with, such as a minor oil leak or an engine that’s near TBO, but not yet over the line.

Important, too, is understanding where your credit score fits in the financing decision. Services such as FreeCreditReport.com allow you to view your score, but won’t count the look-see against you. Checking your credit in other ways can actually drag down your score.

Smestad said when financing an airplane, “It’s not like a car loan that’s based only on your credit score.” He said the magic credit score these days “is about 740-760.” But he said his company will look closer at a buyer with a rating in the 600s before saying no to possibly uncover extenuating circumstances that when explained will again make the buyer a good candidate. Smestad said not all lenders will dig deeply into the numbers.

Zook said he’d have trouble finding a bank to finance a purchase if the buyer’s credit score was less than 700. “I know there are banks that will finance deals like this,” he said, “but their fees and rates will be higher.”

A buyer could simply reach out to a local bank and maybe get lucky, but success will probably come quicker through a broker who works with a number of banks. Brokers will normally take the time and offer advice on how to structure a buyer’s paperwork for an approval. Banks often just offer a yes or no decision.

Kaleb Timberlake, a non-pilot for the moment, went with a local bank when he decided to buy an airplane to learn to fly. He says he was surprised by “the affordability of owning an airplane for me to learn in. Until recently, I always thought buying my own airplane was just crazy money and that I could never afford it.”

Timberlake took advantage of personal flying resources: an aunt who happens to be a CFI and many of her contacts in the 99’s when he wanted to buy an airplane to learn in at his local airport, Eagle County Regional (KEGE) in Colorado. He settled on a 200 hp Beechcraft Super Musketeer.

“Now I just needed to pay for it,” he said. “I did look at brokers online who gave me a few preliminaries and their numbers were high.”

On a whim, he walked into his local bank in Eagle and talked to one of the vice presidents. His bank had little experience with airplane loans, but “the vp offered me a 6.9 percent interest rate for seven years with 10 percent down,” he said. Timberlake readily admitted, “I’m aware of how much I don’t know,” so he again reached out to his network and received a positive nod. Up next is the prebuy inspection on the Musketeer.

Banks collect a fee to begin processing a loan, while a broker is paid by the lender itself, a strategy that alters how the lending institution interacts with the buyer. In the case of Air Fleet Capital, Smestad said, “We place most of the business but are always involved for the life of the loan. We underwrite the process ourselves. We’re trying to understand the buyer’s business and how they intend to use the airplane. We want long-term relationships.”

Essentially then, brokers feel free to tell buyers when they believe they’re looking at the wrong airplanes, such as when a current high-performance single-engine owner decides to buy a jet. Most brokers handle the complete underwriting process including running a credit check or reviewing the tax returns. Smestad said the average buyer that comes to Air Fleet Capital already has very good credit, because they’re often entrepreneurs who have earned their credit ratings.

Brokers also run their own history checks on aircraft, searching for potential damage that might kill deals when presented to banks. Smestad recalled a deal when his company knew more about the damage history of an airplane than the buyer. The seller had told the buyer the airplane had a little hangar rash, which turned out to be evidence of a gear-up landing in Air Fleet’s search.

Zook remembered when a title search turned up a lien that, although paid off, had never been released by the lending institution. In another case, he found logbooks that somehow missed a prop strike that should have resulted in an engine tear down that was never performed. His client decided against the aircraft.

When an aircraft has been damaged, a broker wants “to know who repaired the aircraft,” Zook said. “Was it a reputable firm or Joe Baga Donuts working under a shady tree?” Brokers also work on your behalf to fix problems such as missing logbooks that can reduce the aircraft’s market value, sometimes considerably.

In March 2019, rates were running from the high 4 percent range to the low 6 percents. Rates can vary by aircraft type, age, how it will be used and the amount of the down payment. Most aircraft loans are amortized for 20 years, except in some heavy-use scenarios. A single-engine airplane purchased to lease back to a flight school that might clock 100 hours a month can only be had for a larger down payment and often a shorter amortization schedule.

Zook and Smestad agreed that being preapproved before beginning the search for an airplane produces the best results. “This makes it easier for a buyer to shop with confidence,” Smestad said, since that approval is good for up to 90 days. When the buyer locates the right aircraft, all that’s needed are photos of the airplane and copies of the logbooks. Zook said with this information in hand, he can often get a final approval within 48 hours.

Liquidity is important to closing any deal because financing is a bit like going to a baseball game. The ticket, or the down payment in this case, just gets you started. You still have to buy the hot dogs and popcorn and a beverage. If you have only enough money to meet the down payment but nothing to fall back on, that can be a problem down the road. It costs money to operate an airplane and some brokers want to see a year’s worth of expenses in the bank before they’ll say yes.

Closing is the time when the money is transferred to the seller and the FAA documents are signed. This can happen in as little as a week or take as long as 45 days. The closing is often handled through an escrow agent based in Oklahoma City because the FAA’s Public Document room is based there.

Escrow agents are the final link in the chain because they can walk to the other side of the PD room and file the necessary bills of sale and registration applications, not just to allow the buyers to prove they own the aircraft, but also to record banks’ security interest in them. The buyer and the seller usually split the cost of the escrow agent, a fee normally based on the amount of the money being transferred.

Worth noting from Dave Coleman, “I have had deals delayed for as much as a week or so due to the buyer not having worked out the details with the bank in advance. Even when it is all planned, I have had a banker go on vacation without giving authorization to send money to escrow.”

Where closings once meant stacks of paper moving around the country in FedEx envelopes, Smestad said most documentation is handled electronically with tools such as Doc-U-Sign. To make a financing deal work, he suggests working with brokers who really know what they’re doing, the experts in the industry. “If you call a broker and you have poor credit, but the broker says, ‘We can do it but we need a thousand bucks up front,’ don’t do it. A reputable broker doesn’t ask for upfront money,” Zook said.

Buyers should demand a firm commitment letter from a lending institution before giving them any money. “We’ve had customers work with local banks that turned out not to know what they were doing, a process that really frustrates the buyer,” Smestad said. “Dealing with true aircraft finance professionals can save customers a lot of money and time.”