Down payment. The bigger it is, the smaller will be your monthly obligation.
Amortization period. The time over which the loan is paid back in installments. On a $1 million loan, extending the amortization from 15 to 20 years would save nearly $16,000 in payments during the first year. However, your loan balance at the end of the year is approximately $16,000 higher.
Interest rate. For comparison, using the same loan parameters, if the interest rate dropped 20 percent, from 5 to 4 percent, you would only save about $6,000 in payments during the first year. However, reducing one’s interest rate by 20 percent results in interest savings of almost $10,000 in the first year.
LTV. The ratio of the loan as a percentage of the total appraised value calculates one’s down payment. However, LTV also determines what the amortization is, as well as what other options might be available. With a strong enough LTV, an aircraft owner can have essentially infinite amortization in the form of an “interest-only” loan with a balloon payment due at the end.
Why choose the interest-only option? Historically the most common reason is to maximize a tax benefit, where there’s a known business use for the aircraft. Writing off the depreciation of the aircraft and the interest expense allows the owner to enjoy a low monthly payment, business expense deduction on the aircraft, and potential tax deduction on the interest. However, in volatile stock market conditions (as currently exist), another good reason for interest-only loans, especially on owner-flown aircraft, is to preserve cash flow and personal liquidity. If the stock market generates an 8-percent return and you can borrow at 4 percent, borrowing on your aircraft instead of paying cash can theoretically generate an additional 4-percent return.