Aircraft Financing Glossary

A

Agreed Value

The predetermined amount that will be paid for an aircraft in case of total loss, as specified in an insurance policy. Unlike actual cash value, agreed value is established at policy inception and doesn't depreciate during the policy period, providing certainty for both borrowers and lenders.

Aircraft Management Agreement

A contract between an aircraft owner and a professional management company that handles operational responsibilities including maintenance coordination, crew management, scheduling, and regulatory compliance. Often required by lenders for high-value aircraft financing.

Aircraft Purchase Agreement

The legal contract between buyer and seller outlining purchase terms, conditions, price, delivery requirements, and contingencies. This document is essential for securing aircraft financing and typically includes pre-buy inspection contingencies and financing approval clauses.

Airworthiness Certificate

An FAA document certifying that an aircraft meets applicable safety and design standards. A valid airworthiness certificate is mandatory for aircraft financing approval and must be maintained throughout the loan term for continued airworthiness compliance.

Amortization

The process of gradually paying down a loan principal through regular payments over the loan term. Aircraft loan amortization schedules show how each payment is divided between principal reduction and interest, with early payments typically containing more interest.

Annual Percentage Rate (APR)

The total yearly cost of financing including interest rate and additional fees, expressed as a percentage. APR provides a standardized way to compare aircraft financing offers from different lenders and typically ranges from 5-9% for qualified borrowers.

Asset-Based Lending

Financing secured primarily by the aircraft's value rather than borrower creditworthiness alone. The aircraft serves as collateral, allowing lenders to offer competitive rates based on the asset's market value and liquidity rather than solely on personal financial strength.

B

Balloon Payment

A large final payment due at the end of a loan term that pays off the remaining principal balance. Aircraft financing with balloon payments typically offers lower monthly payments but requires refinancing or asset sale to satisfy the balloon payment.

Borrower

The individual or entity receiving aircraft financing who is legally obligated to repay the loan according to agreed terms. Borrowers must meet credit, income, and aviation experience requirements while maintaining insurance and aircraft airworthiness throughout the loan period.

C

Cash Flow

The net amount of money moving in and out of an aircraft operation, including loan payments, operating expenses, and any revenue generation. Positive cash flow indicates that aircraft generates more income than expenses, improving financing qualification and loan sustainability.

Collateral

The aircraft and potentially other assets pledging to secure a loan, which the lender can seize if the borrower defaults. Aircraft serve as excellent collateral due to their portability, identifiable registration systems, and established market values for recovery.

Commercial Use

Aircraft operations conducted for compensation or hire, including charter, cargo, instruction, or business transportation. Commercial use typically requires higher insurance limits, additional pilot qualifications, and may affect financing terms due to increased utilization and regulatory requirements.

Conditional Sales Agreement

A financing arrangement where the borrower takes possession and use of the aircraft but the lender retains title until the loan is fully paid. This structure provides security for the lender while allowing immediate aircraft use by the borrower.

Cross-Default Clause

A loan provision that triggers default if the borrower defaults on other significant debts, even if aircraft loan payments are current. This clause protects lenders by providing early warning of financial distress and potential collection difficulties.

D

Debt Service Coverage Ratio (DSCR)

A financial metric comparing available cash flow to debt payment obligations, typically required to be 1.25 or higher for aircraft financing approval. DSCR demonstrates the borrower's ability to service debt from available income and cash flow.

Default

Failure to meet loan obligations, including missed payments, insurance lapses, or covenant violations. Default can trigger acceleration of the entire loan balance, aircraft repossession, and legal action, making it crucial to maintain compliance with all loan terms.

Depreciation

The decline in aircraft value over time due to age, usage, and market conditions. Tax depreciation allows business aircraft owners to deduct a portion of the aircraft's cost annually, providing significant tax benefits for eligible operations.

Down Payment

The upfront payment made by the borrower, typically 15-25% of the aircraft's value, reducing the loan amount and demonstrating commitment to the purchase. Larger down payments often result in better interest rates and loan terms from lenders.

Dry Lease

An aircraft lease arrangement where the lessee provides crew, maintenance, insurance, and operations, receiving only the aircraft itself. This differs from wet leases that include crew and services, offering more operational control but increased responsibility for the lessee.

E

Early Payment Penalty

A fee charged for paying off a loan before its scheduled maturity date, compensating lenders for lost interest income. Many aircraft loans include prepayment penalties, especially during the initial years, making it important to understand these terms before financing.

Equity

The difference between an aircraft's current market value and the remaining loan balance, representing the owner's financial interest in the asset. Positive equity provides security for refinancing and additional borrowing capacity for future aircraft purchases.

Escrow

A neutral third-party service that holds funds, documents, and aircraft during the purchase and closing process, ensuring all conditions are met before releasing money and transferring title. Escrow provides security for both buyers and sellers in aircraft transactions.

F

Fixed Interest Rate

An interest rate that remains constant throughout the loan term, providing predictable monthly payments and protection against rising market rates. Fixed rates offer payment certainty but may be higher initially than variable rates depending on market conditions.

Float Plan

A detailed flight itinerary filed with responsible parties, including departure time, route, destination, and expected arrival, enhancing safety and providing location information for search and rescue if needed. Some insurance policies require float plans for coverage validation.

G

Grace Period

A specified time after a payment due date during which the borrower can make payment without incurring late fees or default consequences. Grace periods typically range from 10-15 days and provide flexibility for administrative delays or cash flow timing.

Guarantee

A promise by a third party to pay loan obligations if the primary borrower defaults, often required for aircraft financing when borrower creditworthiness or cash flow is insufficient. Personal guarantees from business owners or wealthy individuals strengthen loan applications significantly.

H

Hull Insurance

Physical damage coverage protecting the aircraft against loss, damage, or destruction from covered perils including accidents, theft, vandalism, and weather events. Hull insurance is required by all aircraft lenders and should equal or exceed the outstanding loan balance.

I

Installment Loan

A loan repaid through regular fixed payments over a predetermined period, with each payment including both principal and interest components. Most aircraft financing uses installment loans with monthly payments structured to fully amortize the debt over the loan term.

Interest Rate

The annual cost of borrowing money expressed as a percentage of the loan amount, representing the lender's profit and risk compensation. Aircraft loan interest rates vary based on borrower creditworthiness, aircraft age and type, loan terms, and market conditions.

International Registry

The global registration system for aircraft objects under the Cape Town Convention, providing standardized international recognition of security interests. This registry enhances lender protections for aircraft financing involving international operations or cross-border transactions.

L

Lien

A legal claim against an aircraft securing payment of a debt, recorded with aviation authorities and preventing clear title transfer until the obligation is satisfied. Aircraft liens must be properly filed and maintained to protect lender interests effectively.

Loan-to-Value Ratio (LTV)

The percentage relationship between the loan amount and the aircraft's appraised value, typically ranging from 75-90% for aircraft financing. Lower LTV ratios reduce lender risk and often result in better interest rates and terms for borrowers.

Loss Payee

The party designated to receive insurance proceeds in case of aircraft loss or damage, typically the lender for financed aircraft. Loss payee status protects the lender's financial interest by ensuring insurance payments are applied to reduce outstanding loan balances first.

M

Maturity Date

The final date when all remaining loan principal and interest must be paid in full, completing the borrower's obligation under the financing agreement. Aircraft loan maturities typically range from 15-25 years depending on aircraft age and type.

Monthly Payment

The regular amount paid by the borrower to service the loan, typically including principal, interest, and sometimes escrow amounts for insurance and taxes. Aircraft loan payments are usually due on the same date each month throughout the loan term.

N

Net Worth

The total value of assets minus liabilities, representing an individual's or entity's financial position. Lenders evaluate net worth to assess borrowing capacity and financial stability, often requiring net worth to exceed aircraft value for financing approval.

Notice of Default

A formal written notification from the lender to the borrower specifying loan violations and demanding corrective action within a specified timeframe. This notice typically precedes more serious collection actions and provides opportunity to cure defaults before acceleration.

O

Operating Lease

A lease arrangement where the lessor retains ownership and most risks/rewards of aircraft ownership while the lessee pays for usage rights. Operating leases offer lower initial costs and operational flexibility but don't provide equity building or ownership benefits.

Origination Fee

An upfront fee charged by lenders to cover loan processing, underwriting, and administrative costs, typically 1-2% of the loan amount. Origination fees are usually paid at closing and may be financed into the loan amount for qualified borrowers.

P

Personal Guarantee

A commitment by an individual to repay corporate or business debt if the primary entity defaults, creating personal liability for business obligations. Personal guarantees are often required for aircraft financing to strengthen credit quality and provide additional collection sources.

Pre-Buy Inspection

A comprehensive aircraft evaluation conducted before purchase to assess airworthiness, condition, and maintenance compliance. Pre-buy inspections are typically required by lenders and can reveal issues affecting aircraft value and financing approval, costing $5,000-15,000.

Prepayment

Payment of loan principal before the scheduled due date, reducing total interest costs and shortening the loan term. Some aircraft loans include prepayment penalties while others allow unlimited prepayments without penalty, providing flexibility for borrowers.

Principal

The original amount borrowed, excluding interest and fees, that must be repaid over the loan term. Principal balances decrease with each payment according to the amortization schedule, building borrower equity in the financed aircraft.

Q

Qualified Borrower

A borrower meeting lender criteria for creditworthiness, income, aviation experience, and financial capacity. Qualified borrowers typically receive the best available interest rates and terms, while marginally qualified borrowers may face higher costs and additional requirements.

R

Recourse Loan

A loan where the lender can pursue the borrower's other assets beyond the collateral aircraft if the aircraft value is insufficient to satisfy the debt. Recourse loans provide stronger lender protections but create broader personal liability for borrowers.

Refinancing

Replacing an existing loan with new financing, typically to obtain better terms, lower payments, or access equity. Aircraft refinancing can provide opportunities to reduce costs or obtain cash for other purposes when market conditions are favorable.

Repossession

The lender's legal right to take possession of collateral aircraft when borrowers default on loan obligations. Repossession procedures must follow applicable laws and loan agreements, after which aircraft are typically sold to recover outstanding debt balances.

Residual Value

The expected market value of an aircraft at a future date, important for lease calculations and loan underwriting. Strong residual values support better financing terms while declining residuals may limit loan amounts and terms available.

S

Security Agreement

The legal document creating and perfecting the lender's security interest in collateral aircraft, typically filed with the FAA Aircraft Registry. Security agreements detail the collateral description, borrower obligations, and lender rights upon default or other events.

Security Interest

The lender's legal right to the collateral aircraft securing a loan, allowing repossession and sale if the borrower defaults. Properly perfected security interests provide priority over other creditors' claims and are essential for effective loan collection.

Title Search

A comprehensive review of aircraft ownership records to verify clear title and identify any existing liens, claims, or encumbrances. Title searches are essential before aircraft financing to ensure the seller has legal authority to transfer clean title to buyers.

T

Term

The length of time over which a loan will be repaid, typically expressed in years for aircraft financing. Longer terms result in lower monthly payments but higher total interest costs, while shorter terms provide faster equity building and lower total costs.

Title Insurance

Insurance protecting against losses from title defects, forgeries, or other ownership issues not revealed by title searches. While not always required, title insurance provides valuable protection for both lenders and borrowers in aircraft transactions.

Truth in Lending Act (TILA)

Federal law requiring lenders to disclose loan terms, costs, and conditions in a standardized format, helping borrowers compare financing offers and understand their obligations. TILA disclosures are required for most consumer aircraft loans.

U

Underwriting

The process of evaluating loan applications to assess creditworthiness, collateral value, and repayment capacity. Aircraft loan underwriting considers borrower finances, aviation experience, aircraft condition and value, and market factors affecting loan risk.

Useful Life

The period over which an aircraft is expected to provide economic benefit, important for tax depreciation calculations and loan term determination. Useful life varies by aircraft type and usage but typically ranges from 15-30 years for tax purposes.

V

Variable Interest Rate

An interest rate that changes periodically based on market conditions or benchmark indices, potentially resulting in payment fluctuations over the loan term. Variable rates may start lower than fixed rates but create uncertainty about future payment amounts.

W

Wet Lease

An aircraft lease arrangement including crew, maintenance, insurance, and operational services along with the aircraft itself. Wet leases provide turnkey aviation solutions but typically cost more than dry leases due to included services and reduced lessee responsibilities.

Working Capital

The difference between current assets and current liabilities, representing available funds for operations. Adequate working capital is important for aircraft ownership to cover operating expenses, maintenance reserves, and unexpected costs throughout ownership.