You’ve moved past dreaming about your next modification and are ready to make that dream a reality. First, the two biggest questions you need to have answered: What can you afford to spend and what can you get for that investment? Most of us don’t have the luxury of paying cash out of pocket to make it happen.
What are your options?
Dealer/OEM Financing
Personal loan
Refinance Existing Loan
New Loan
Dealer/OEM Financing
Dealers, and sometimes OEMs, may offer their own finance deals. Because their rates and terms might not be the best available, their offers should be weighed against the interest rate, term of the loan and total cost.
Personal Loan
Some individuals and businesses possess credit strong enough to call up their bankers and obtain loans for which the borrower personally guarantees the loan. Caution here, such loans may encumber other assets, such as homes or business assets in the process.
New Loan
The ability to finance the cost of an upgrade might be as close as your own airplane. By using the airplane as an asset, such as you would a home, you generally can find some attractive finance options, and you can use the airplane to secure the loan you need to build the modifications you want.
With respect to the ability to finance improvements and upgrades, there are a few things to consider. In terms of improvements that are considered to add value to an aircraft, the amount that can be financed will vary depending on the aircraft and upgrade. In general, most finance companies can finance 50% to 80% of the equipment price for the upgrade. Labor costs for new equipment installation are not included, as these costs don’t add value. A lender will often need to establish the current value of the aircraft, then understand the value-added of the upgrades you are considering. It is important to know that value-added may be viewed differently by the lender, as a lender may estimate the value following depreciation after the first 1-2 years for example.
Refinance Existing Loan
If you have a loan on your current aircraft, you could refinance the loan and include the upgrades and improvements wrapped into one new loan.
The first question to resolve: How much is my airplane currently worth? Current market values provide the basis on which finance companies weigh a loan. Most finance companies limit their loans to 80 or 90 percent of an airplane’s worth. You can tap services like Vref, brokers and your hull insurance value to get relevant value numbers.
Another component of information to weigh is the impact of the upgrade on that value number. The good news is, you typically can factor in the new value of the upgraded airplane and use it as the basis for calculating a maximum finance amount.
Financing an upgrade is not unlike a home-equity loan, where you can borrow against that unencumbered value. If you have an aircraft with equity the lender will use the airplane as security for the loan. The upgrade installation becomes part of the total value of that aircraft.
Using the airplane as the finance security also has major advantages — the best terms, the best interest rates, and the best security.
Caution: Industry experts recommended against loans on an aircraft upgrade in which the lender holds a lien on that equipment separate from the aircraft. Such liens can complicate selling the airplane. The aircraft itself is your best security on a loan. It tends to hold its value and likely appreciates during the life of the loan, further increasing your equity.
What's Next?
For any finance option, find out what the interest rate is, the total costs of financing and the period of repayment. It is highly recommended that you consult with an aircraft-finance specialist as you weigh your options. Most aircraft-finance specialists are well equipped to help you assess the value of your aircraft and find terms superior to signature loans, in-house finance or your personal credit card. Financing your upgrades can not only help make your dream a reality but increase the overall resale value of your airplane should you choose to sell it at a later date.
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