Are Interest-Only Payments an Option for Aircraft Loans?

In the world of specialized financing, you may hear about interest-only loans. This is a loan structure where, for a set period, the borrower only pays the interest on the loan, with no principal being paid down. While this is a powerful tool for maximizing cash flow, it is relatively uncommon in standard aircraft financing.

When Are Interest-Only Loans Used?

Interest-only payment structures are typically reserved for specific, short-term scenarios and high-net-worth individuals. They might be used for:

• Bridge Financing: To "bridge" a gap between the purchase of a new aircraft and the sale of an old one.
• Corporate and Charter Use: A business may use an interest-only structure for a short period to align with a specific contract or to maximize operational cash flow.
• Wealth Management Strategy: A high-net-worth individual might use an interest-only loan as part of a broader strategy to deploy capital elsewhere for a higher return.

The Pros and Cons

The primary advantage is cash flow. Your monthly payment will be significantly lower than on an amortizing loan. However, the major disadvantage is that you are not building any equity in the aircraft through your payments. At the end of the interest-only period, you will still owe the full principal amount, which will either become due in a large balloon payment or begin to amortize over the remaining term of the loan.