Refinancing Your Aircraft Loan: Complete Guide to Lower Rates

What Is Aircraft Loan Refinancing?

Aircraft loan refinancing means taking out a new loan to pay off your existing aircraft loan, ideally with better terms. The new lender pays off your current lender, and you begin making payments under the new loan's terms. The aircraft remains collateral, but the lien transfers to the new lender.

Refinancing differs from loan modification, where your existing lender changes your current loan terms. While modifications are simpler, they're less common and lenders have no obligation to modify terms. Refinancing gives you more control by shopping the competitive market for better offers.

When Refinancing Makes Financial Sense

Interest Rates Have Dropped Significantly

The most common refinancing motivation is securing a lower interest rate. As a general rule, if market rates have fallen at least 1% below your current rate, refinancing warrants serious consideration. The larger your remaining loan balance and the more years left on your term, the more impactful rate reductions become.

For example, if you have a $175,000 balance at 8.5% with 12 years remaining, refinancing to 7.0% saves approximately $21,000 in total interest—far exceeding typical refinancing costs of $3,000-$5,000. Your monthly payment drops from $1,886 to $1,757, saving $129 monthly.

However, don't refinance for marginal rate improvements. A 0.25% rate reduction on a $100,000 balance with 7 years remaining saves only about $1,000 total—barely covering refinancing costs. Use our loan calculator to model your specific scenario before proceeding.

Your Credit Score Has Improved Substantially

If your credit score has increased significantly since original financing—say from 680 to 750—you likely qualify for much better rates now. Credit score improvements of 50+ points can reduce rates by 0.5-1.5%, creating substantial savings opportunities.

This commonly occurs when buyers initially financed with fair credit but improved their financial management over several years. Paying down debt, maintaining perfect payment history, and aging negative items off credit reports can dramatically improve your credit profile and refinancing options.

You Want to Change Loan Terms

Beyond rate reduction, refinancing allows term modifications:

• Shorten term to save interest: If your income has increased, refinancing from a 20-year to a 10-year term dramatically reduces total interest, even if the rate stays similar.
• Extend term to lower payments: If you need payment relief, extending the term reduces monthly obligations, though this increases total interest costs.
• Switch from variable to fixed rate: If you have a variable-rate loan and rates are rising, locking in a fixed rate provides payment certainty.

Consider a $150,000 loan at 7.5% with 15 years remaining. Refinancing to 10 years at the same rate increases payments from $1,390 to $1,781 but saves approximately $35,000 in total interest. Conversely, extending to 20 years drops payments to $1,208 but adds roughly $40,000 in interest costs.

Your Aircraft Has Appreciated

Recent years saw strong appreciation in piston aircraft values. If your aircraft has increased in value while you've paid down principal, your loan-to-value ratio improved significantly. This enhanced equity position may qualify you for better rates than originally available.

For instance, if you financed $170,000 on a $200,000 aircraft (85% LTV) and the aircraft is now worth $240,000 with $140,000 owed, your LTV is only 58%. This dramatic equity improvement makes you a lower-risk borrower eligible for premium rates.

You Want to Cash Out Equity

Cash-out refinancing lets you borrow against your aircraft equity for other purposes. If your aircraft is worth $250,000 and you owe $100,000, you might refinance for $180,000—paying off the existing loan and receiving $80,000 cash (minus closing costs).

This can fund aircraft improvements, engine overhauls, avionics upgrades, or other investments. However, you're increasing debt and reducing equity, so cash-out refinancing requires careful consideration. Learn more about financing aircraft improvements.

You Need to Remove or Add a Co-Borrower

Life changes like divorce, partnership dissolution, or bringing in a new partner may necessitate changing who's on the loan. Refinancing allows you to restructure ownership and loan obligations to reflect new circumstances.

When Refinancing Doesn't Make Sense

You're Late in Your Loan Term

Most loan interest is paid in early years. If you're more than two-thirds through your original term, you've already paid the majority of total interest. Refinancing late in the term saves little because you're primarily paying principal now.

For example, on a $200,000, 20-year loan at 7.5%, you've paid about $160,000 in interest by year 15. Refinancing the remaining $78,000 balance, even at a full percentage point lower, might save only $3,000-$4,000 over five years—potentially less than refinancing costs.

Refinancing Costs Exceed Savings

Always calculate your break-even point: how many months until monthly savings offset refinancing costs? If you plan to sell the aircraft before breaking even, refinancing wastes money.

Suppose refinancing costs $4,000 and saves $75 monthly. Break-even is 53 months (4.4 years). If you plan to upgrade aircraft in three years, you'll lose $1,300 by refinancing. However, if you'll own the aircraft for 10+ years, you'll save $5,000+ over the remaining term.

Your Financial Situation Has Deteriorated

If your credit score has dropped, debt-to-income ratio has increased, or income has decreased since original financing, you likely won't qualify for better terms. Refinancing might result in worse rates or denial. Focus on improving your financial position before pursuing refinancing.

Your Aircraft Has Become Harder to Finance

Aircraft financeability can change. If your model has fallen out of favor, experienced airworthiness directive issues, or your specific aircraft has developed problems since purchase, lenders may be less willing to finance or offer worse terms. Very old aircraft or those with damage history face increasing financing challenges.

The Aircraft Refinancing Process: Step by Step

Step 1: Evaluate Your Current Loan

Gather complete information about your existing loan:

• Current interest rate and remaining term
• Outstanding principal balance
• Monthly payment amount
• Any prepayment penalties (rare but verify)
• Total interest remaining over loan life

Review your loan documents or contact your lender for a payoff quote. This quote specifies the exact amount needed to satisfy the loan, including any interest through the payoff date.

Step 2: Check Your Credit and Financial Profile

Before applying, understand your current creditworthiness:

• Pull your credit reports from all three bureaus and check for errors
• Know your credit score—has it improved since original financing?
• Calculate your current debt-to-income ratio
• Update your financial statements showing assets and liabilities
• Gather income documentation (pay stubs, tax returns, business financials)

If you find credit report errors, dispute them before applying. Even small score improvements can affect your rate. Learn more about credit requirements for aircraft loans.

Step 3: Determine Your Aircraft's Current Value

Lenders base refinancing on current aircraft value, not original purchase price. Research your aircraft's market value using:

• Aircraft Bluebook Online
• VREF Aircraft Value Reference
• Recent sales of comparable aircraft
• Broker opinions of value

Consider factors affecting value: total time, engine time since major overhaul (SMOH), avionics upgrades, paint and interior condition, damage history, and market demand for your specific model. The lender will order a formal appraisal, but knowing approximate value helps you estimate loan-to-value ratios and likely terms.

Step 4: Shop Multiple Lenders

Don't assume your current lender offers the best refinancing terms. Shop at least 3-5 lenders including:

• Specialized aviation finance companies
• Credit unions with aircraft loan programs
• Banks with aviation lending departments
• Your current lender (they may match competitors to keep your business)

Compare not just interest rates but also:

• Annual Percentage Rate (APR) including all fees
• Origination and closing costs
• Prepayment flexibility
• Loan terms available
• Customer service reputation
• Closing timeline

Getting multiple quotes within a short window (14-30 days) typically counts as a single credit inquiry for scoring purposes, so don't hesitate to shop rates.

Step 5: Submit Complete Application

Once you've selected a lender, submit a complete application package:

• Completed loan application
• Personal financial statement
• Recent tax returns (typically 2 years)
• Income verification (pay stubs, W-2s, or business financials)
• Current aircraft insurance declaration page
• Aircraft logbooks (engine, airframe, propeller)
• Aircraft registration and bill of sale
• Existing loan information and payoff quote

Complete, organized applications process faster. Missing documentation creates delays and can cause rate locks to expire.

Step 6: Appraisal and Title Search

The lender orders an aircraft appraisal to verify current market value. Desktop appraisals cost $1,000-$1,500 and involve appraiser review of logs, photos, and specifications without physical inspection. Full appraisals with inspection cost $1,500-$2,500 but provide more detailed value assessment.

Simultaneously, the lender orders a title search through the FAA registry to verify ownership and ensure no additional liens exist beyond your current loan. This typically costs $300-$500.

Step 7: Underwriting and Approval

The lender's underwriting team reviews your complete file: credit, income, assets, aircraft value, and appraisal. They verify information and may request additional documentation. This process typically takes 1-3 weeks.

Once approved, you'll receive a commitment letter detailing final terms: interest rate, loan amount, term, monthly payment, and closing costs. Review everything carefully and ask questions about anything unclear.

Step 8: Closing

At closing, you'll sign new loan documents including the promissory note and security agreement. The new lender funds the loan by:

• Paying off your existing lender (satisfying the old loan)
• Recording the new lien with the FAA
• Disbursing any cash-out proceeds to you (if applicable)

Your existing lender releases their lien, and the new lender records their security interest. You'll receive confirmation that the old loan is satisfied and new loan is established. Your first payment under the new loan is typically due 30-45 days after closing.

Strategies to Maximize Refinancing Benefits

Time Your Refinancing Strategically

Market timing matters. When the Federal Reserve lowers rates or economic conditions favor borrowers, refinancing becomes more attractive. Monitor rate trends and act when rates are favorable—waiting for the absolute bottom is impossible, but refinancing when rates drop significantly makes sense.

Improve Your Financial Profile First

If possible, strengthen your application before refinancing:

• Pay down credit card balances to improve credit utilization
• Correct credit report errors
• Avoid new credit inquiries for several months
• Pay off small debts to lower debt-to-income ratio
• Build cash reserves to demonstrate financial stability

Even a few months of financial management can improve your credit score 20-40 points, potentially qualifying you for better rates.

Consider Shortening Your Term

If you can afford higher payments, shortening your loan term while refinancing produces dramatic interest savings. The combination of lower rate and shorter term creates compounding benefits.

For instance, refinancing a $140,000 balance from 8% with 12 years remaining to 7% with 10 years saves approximately $28,000 in interest despite the monthly payment increasing by only $145.

Make a Principal Payment at Closing

If you have available cash, consider making an additional principal payment during refinancing. This reduces your loan balance, improves your loan-to-value ratio, and may qualify you for even better rates. The reduced balance also means less interest accrual over the loan life.

Negotiate Fees

Refinancing fees aren't always fixed. Some charges are legitimate hard costs (appraisals, title searches, FAA filing fees), but origination fees and lender charges may be negotiable. Ask lenders to waive or reduce fees, especially if you're a strong borrower with multiple competing offers.

Common Refinancing Mistakes to Avoid

• Refinancing too frequently: Each refinancing costs money. Refinancing every time rates drop slightly wastes money on repeated closing costs. Only refinance when savings clearly exceed costs.
• Resetting to a longer term: Refinancing a loan with 10 years remaining into a new 20-year loan dramatically increases total interest despite lower payments. Maintain or reduce your remaining term when possible.
• Ignoring total costs: Don't focus solely on rate or monthly payment. Calculate total refinancing costs and compare total interest savings to ensure refinancing truly saves money.
• Not reading the fine print: Understand all loan terms, especially prepayment policies, late fees, and any conditions or requirements. Don't sign documents without reading them thoroughly.
• Letting rate locks expire: If you lock a rate, ensure you provide all documentation promptly so closing occurs before the lock expires. Expired locks may require re-locking at current (potentially higher) rates.

Tax Implications of Refinancing

Refinancing can affect your tax situation, particularly for business aircraft:

• Interest deductibility: If your aircraft is used for business, interest on the new loan remains tax-deductible just like the original loan
• Refinancing costs: Closing costs may be tax-deductible over the loan life for business aircraft rather than immediately
• Cash-out proceeds: Money received from cash-out refinancing isn't taxable income, but how you use it may have tax implications

Consult with a tax professional familiar with aircraft ownership to understand specific implications for your situation. Learn more about aircraft tax strategies and depreciation.