http://www.AVBUYER.com AVBUYERMAGAZINEVol 23 Issue 8 2019 47An AOPA Finance client recently requested a quote for
financing a single-engine aircraft. He was looking to finance
$70,000, and was quoted what the interest rate would be
based on that figure. However, had the client borrowed
$75,000 instead of $70,000, the rate would have been a whole
percentage point lower, saving him money. Why is that?
Many borrowers believe the way to get the best interest rate is
through a large down payment and a great credit score. But
actually the No. 1 factor in determining the interest rate
offered on a loan is the amount of money being lent. Lenders
structure each loan around a credit matrix. The matrix is
comprised--among other things--of ranges of loan amounts,
the loan-to-value (LTV) ratio, an individual's total financial
picture, and least of all, that person's credit score.
Lenders group loans into "buckets," or ranges of loan
amounts. For example, in the case of our client, one range
included loan amounts from $50,000 to $74,999. Additionally,
each range of loans has a default initial interest rate associated
with it.
In this case, the lender's next higher range had an interest rate
one full percentage point lower associated with it. This client
had said a top priority of his was to get the lowest possible
interest rate. Therefore, we knew if our client had the
flexibility to increase his loan by $5,000, it would put him in
the higher range, where the default lending rate was better.
Initially, he saw increasing the loan by $5,000 as beneficial
only for the lender. We pointed out that this lender also had a
loan structure that allowed for additional prepayments
without penalty. If our client was willing to hold back $5,000
of his down payment and increase the loan to $75,000, he
could, on Day 2 of the loan, take that held back $5,000 and
apply it immediately to the principal. That would get him
back to $70,000 on the loan while maintaining the lower
interest rate of the $75,000 loan, thus saving him money.
That’s one example of how borrowing more can cost less.
Loan-to-value (LTV) is the second-most important element in
constructing the credit matrix. LTV is a financial term used by
lenders to express the ratio of a loan to the value of the assetpurchased. Generally, an LTV of 80%-85% is deemed an
acceptable risk. LTV requirements are most frequently
influenced by the aircraft and how quickly it is likely to
depreciate. In other words, LTV requirements may be applied
on a sliding scale. Generally, the more quickly a plane is likely
to depreciate, the more money down or lower an acceptable
LTV and vice versa. Additionally, by putting even more
money down and thus lowering the LTV you can frequently
gain better interest rates and terms.
The last, and least important, component of the credit matrix
is one's credit score. Despite what retail financial institutions
and credit reporting agencies pushing credit protection
products advertise in the media, credit scores for aircraft
loans have only a small influence on how lenders determine a
loan's interest rate. The difference between a good credit score
and a great credit score might be a mere quarter of a percent.
It’s a lousy credit score that will hurt the most. A poor credit
score may cost the borrower a full percentage point, or the
loan itself.
Ultimately, obtaining the best loan for you is about providing
you the best perspective on all aspects of it. AOPA Finance
brokers stand ready to share the kind of knowledge, nuance
and expertise that can navigate you to the best loan for your
situation.
Great rates. Great terms. Helpful and responsive reps. Three
good reasons to turn to AOPA Aviation Finance when you are
buying an airplane. If you need a dependable source of
financing with people who are on your side, just call
800.62.PLANE (75263) or go online to request a quote.By Adam Meredith
President of AOPA Aviation Finance CompanyHow Can Borrowing More Cost Less?
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