Why Arent Aircraft’s rates are more like auto and mortgage rates – Aviation finance
For the purposes of this discussion, residual value is the value of an asset at a future point in time. The residuals are influenced by a number of factors. Some makes and models do better than others but the question is why? Besides quality, brand and price, one of the main determinants of volatility is the number of units in existence. In this case, “volatility” is defined as low confidence in predictability. Generally speaking, the more units of an asset there are, the greater the degree of confidence one can have in predicting the value of that asset in the secondary market.
Every year, millions of automobiles are manufactured, creating a large and efficient aftermarket of several millions more. As a result, there are many transactional data points that provide strong confidence in predicting residuals.
The aircraft market is much smaller than the automobile market. One reason for this was the cessation of general aviation manufacturing in the mid-1980s due to excessive product liability lawsuits. While the General Aviation Revitalization Act of 1994 addressed the problem, general aviation piston, turboprop and jet planes are still not produced in prodigious numbers like automobiles. In addition, the size of the aircraft market is small largely due to the small number of active licensed pilots relative to the number of active licensed operators.
On top of all this, the used aircraft market is much more influenced by externalities such as the price of aviation fuel and the state of the overall economy relative to the car market. These market influences make the secondary aircraft market less stable, making the ability to maintain a consistent residual valuation more volatile.
Finally, there is the issue of the cost of money. This cannot be underestimated. For a lender, the way to recoup this cost is to charge interest on the loan. If bank income is the product of the interest rate multiplied by the loan amount multiplied by time, there are four ways to potentially profit from loans: increase the loan amount, increase the loan term, increase the number of loans or increase the interest rate.
Beware of lenders who advertise interest rates as low as those currently available for home loans. The reality is that these low rates tend to be for larger loans over $ 250,000 or shorter term loans with a balloon, or loans with floating rates. The amount of work involved in taking out and documenting an airplane loan under $ 100,000 is not much different than that of a million dollars. As a result, the actual costs associated with granting a loan are proportionately much higher and the ability to offer lower rates is therefore reduced. Bottom line, whether it’s for planes, boats, or whatever, expect low cost loans to come with a higher interest rate.
Very good advice. Excellent rates. Helpful and responsive representatives you can trust. Three good reasons to turn to AOPA aeronautical financing when you buy or refinance an aircraft. If you need a reliable source of funding with people who are by your side, just call 800.62.PLANE (800.627.5263), or click here to request a quote.