Aircraft Loans - How To Avoid The Shouting And The Fistfights At The Closing

© Copyright 2009
D. Alan Carter, All Rights Reserved

Unless you somehow dodged the 2008 meltdown on Wallstreet and have cash coming out of your windsocks, you’re likely going to need to finance a sizable chunk of the aircraft of your dreams. If you’ve bought a house or two in your life, you probably know that whatever can go wrong at a closing, will. That axiom holds true for aircraft purchases, too. A loan is money and money is personal, and the bigger the dollar amount and the bigger the collateral, the bigger the opportunity for shouting and fistfights at the closing.

Here’s five tips to keep your aircraft loan closing free of both.

Aircraft Loan Tip #1 - Order A Pre-Purchase Inspection

I’ve known guys who would coax a top-flight auto mechanic out of retirement just to look over a used car like one of those, oh I don’t know, let’s say a restored 1971 MGB GT, before plopping down a few thousand to buy it. OK, that was me. But the point is, I didn’t need the expert inspection in order to get a loan for the car. The bank was happy to add me to their client list with nothing more than a glance at the Kelley Blue Book. I wanted the expert inspection to give the confidence that the car was in good mechanical shape. More than the idea of throwing good money away on a bum car, I didn’t want to find myself flying down the highway at 70 mph when the frame folded in two from rust (rust is a well-known problem with the old MG’s).

Worse still, the idea of flying above that highway at 200-500 mph when some critical wingnut takes a hike. Order a pre-purchase inspection of your aircraft before the closing – preferable as a contingency on the purchase agreement.

I know what you’re thinking: unless the aircraft is spanking new, the lender (especially traditional financial institutions like banks) will likely require an appraisal. So why bother with an inspection? Why spend the extra money? You bother with the inspection, you spend the extra money, because the lender is only concerned with the value of the aircraft. You, on the other hand, are concerned with value and safety. A good mechanic working on your behalf (and not the lender’s), can provide some peace of mind - at the closing and beyond.

Aircraft Loan Tip #2 - Order A Comprehensive Title Search

Let’s assume for the moment that you’re buying a used aircraft. As with an aircraft appraisal, the lender will order a basic aircraft title search prior to closing. This typically amounts to a search by the title company of the FAA Registry in Oklahoma City, and depending upon the aircraft, a search of the international registry as per the Cape Town Convention.

So why should you order one too, at additional expense? Because a more detailed, independent review of the aircraft title – past ownership, security interests, damage to the aircraft, etc. – might uncover problems that are overlooked on a cursory examination which is primarily focused on past ownership and outstanding liens. So consider springing for your own comprehensive title search; it’s a small price to pay to better understand the history of your aircraft.

Aircraft Loan Tip #3 - Consult With Your Accountant or Tax Attorney Regarding Registration Options

Depending on your individual tax situation and the particulars of why you’re buying an aircraft (i.e. business or pleasure or both), there may be advantages to registering your aircraft to a corporation or Limited Liability Corporation (LLC). Explore these options far in advance of the loan processing, giving yourself plenty of time to set up such a structure if it’s to your advantage. Otherwise, expect to gum up the closing with a bunch of last minute corporate filings.

Aircraft Loan Tip #4 - Get A Jump On Insurance

Shop around for insurance even before settling on an aircraft. Insurance costs can vary wildly depending upon the aircraft, and your experience as a pilot. In fact, insurance cost is such a wild card that it could eliminate a particular aircraft from consideration. So much better to find that out before the loan processing costs begin mounting.

Aircraft Loan Tip #5 - Know All Costs Before The Closing

Speaking of loan processing costs, learn what they’re going to be before the process even begins. The borrower is typically stuck with all costs incurred by the lender in processing and closing the aircraft transaction. That will likely include fees for such things as title search and title insurance, appraisal, escrow, and recording and registration. The lender should provide a detailed and an itemized list of those costs.

But don’t stop there. Remember to factor in such things as the ongoing cost of insurance, storage, maintenance, annual inspection, taxes and fuel. You don’t want the day of the closing to become the first day you put your aircraft on the market because you hadn’t thought through the full cost of ownership.

With a little forward planning, the closing for your aircraft loan will be as uneventful as a Phillies opener. If you didn’t have to sign so many papers, you could take a nap.

A more thorough discussion on lending procedures can be found in the ABC's of Aircraft Financing. And for practical tips and advice from borrowers themselves, see Aircraft Loans, Moans and Groans.

One final tip: once you’ve bought your aircraft, stop looking at other planes.

-- D. Alan Carter