Understanding Aircraft Loan Rates: What Determines Your Interest Rate

How Aircraft Loan Interest Rates Work

Aircraft loan interest rates represent the annual cost of borrowing money, expressed as a percentage of the loan amount. Unlike mortgages where rates are highly publicized and standardized, aircraft loan rates are more individualized and vary significantly based on the borrower's qualifications and the specific aircraft.

Most aircraft loans use simple interest calculation, where interest accrues only on the outstanding principal balance. Your monthly payment includes both principal (reducing the loan balance) and interest (the lender's profit). Early in the loan term, most of your payment goes toward interest. As the principal decreases over time, more of each payment reduces the principal balance.

For example, on a $150,000 loan at 7.5% over 15 years with a monthly payment of $1,390, your first payment might include $938 in interest and $452 in principal reduction. By the final payment, nearly the entire $1,390 goes toward principal. This amortization structure is why extra principal payments early in the loan have such significant impact on total interest paid.

Primary Factors That Determine Your Interest Rate

Your Credit Score and History

Credit score is perhaps the single most influential factor in determining your aircraft loan rate. Lenders use credit scores as a proxy for risk—the likelihood you'll repay the loan as agreed. Here's how credit scores typically impact aircraft loan rates:

• Excellent Credit (740+): Qualify for the best available rates, often 6.5-7.5% in current markets
• Good Credit (680-739): Competitive rates, typically 7.5-8.5%
• Fair Credit (640-679): Higher rates around 8.5-9.5% with possible additional requirements
• Below 640: May struggle to qualify or face rates above 10% with substantial down payment requirements

Beyond the score itself, lenders examine your credit history for payment patterns, debt levels, credit mix, and recent inquiries. Late payments, collections, bankruptcies, or foreclosures significantly impact both approval odds and rates. Multiple recent credit inquiries may suggest financial stress, though rate shopping within a 30-day window typically counts as a single inquiry.

Down Payment Amount

Larger down payments reduce lender risk and typically result in better interest rates. When you put more money down, you have more equity at stake, making default less likely. The loan-to-value (LTV) ratio—loan amount divided by aircraft value—directly affects your rate:

• 80% LTV (20% down): Standard rates for qualified borrowers
• 75% LTV (25% down): May receive 0.25-0.5% rate reduction
• 85-90% LTV (10-15% down): Expect 0.25-0.75% rate increase
• Above 90% LTV: Difficult to secure; if available, significantly higher rates

Some buyers strategically increase their down payment specifically to qualify for better rates. Running the numbers often shows that putting down an additional $10,000-20,000 saves more in interest than it costs in opportunity cost, especially in low-return investment environments.

Loan Term Length

Shorter loan terms generally receive lower interest rates because the lender's money is at risk for less time. A 10-year loan might be offered at 7.0% while a 20-year loan on the same aircraft to the same borrower might be 7.75%. This rate difference compounds the already dramatic total interest difference between short and long terms.

Consider a $150,000 loan comparing 10-year versus 20-year terms:

• 10 years at 7.0%: Monthly payment of $1,742, total interest of $59,040
• 20 years at 7.75%: Monthly payment of $1,225, total interest of $144,000

The 20-year loan's lower monthly payment costs an additional $85,000 in interest. While longer terms provide payment flexibility, they're expensive. Choose the shortest term you can comfortably afford to minimize total cost.

Aircraft Type, Age, and Condition

The specific aircraft being financed affects your rate. Lenders prefer popular models with strong resale markets, making repossession and resale easier if necessary. A Cessna 172, Piper Cherokee, or Beechcraft Bonanza in good condition typically qualifies for better rates than an unusual or experimental aircraft with limited market demand.

Aircraft age and condition also matter. Well-maintained aircraft with modern avionics, recent engine overhauls, and complete logbooks present lower risk. Very old aircraft (typically 40+ years), those with damage history, or planes with high engine time may face higher rates or larger down payment requirements. Some lenders won't finance aircraft above certain ages or below certain values.

Your Income, Assets, and Debt-to-Income Ratio

Lenders evaluate your financial capacity to repay the loan comfortably. Key metrics include:

• Debt-to-Income Ratio (DTI): Your total monthly debt payments divided by gross monthly income. Most lenders prefer DTI below 40-45% including the new aircraft payment.
• Liquidity: Cash and liquid assets available for down payment, reserves, and unexpected expenses. Lenders like to see 6-12 months of payments in reserves.
• Net Worth: Total assets minus liabilities. Substantial net worth strengthens applications and can offset other weaknesses.
• Income Stability: Consistent employment history and reliable income demonstrate lower risk than irregular or declining income.

Self-employed borrowers face additional scrutiny and may need to provide multiple years of business tax returns, profit and loss statements, and balance sheets. Lenders want to see stable or growing business income, not just personal income.

Market Factors That Influence Aircraft Loan Rates

Federal Reserve Policy and Overall Economy

Aircraft loan rates don't exist in a vacuum—they're influenced by broader economic conditions and Federal Reserve monetary policy. When the Fed raises the federal funds rate to combat inflation, borrowing costs across the economy increase, including aircraft loans. Conversely, when the Fed cuts rates to stimulate economic activity, aircraft loan rates typically decrease.

However, the relationship isn't immediate or perfectly correlated. Aircraft lenders also consider their own cost of funds, competitive pressures, loan demand, and risk appetite. During economic uncertainty, lenders may tighten standards and raise rates even if the Fed hasn't changed policy.

Aviation Market Conditions

Supply and demand dynamics in the aircraft market affect financing rates. When aircraft demand is strong and values are rising, lenders view aircraft as better collateral and may offer more competitive rates. During market downturns when values decline, lenders become more conservative, potentially raising rates or tightening standards.

The COVID-19 pandemic illustrated this dynamic. Initially, uncertain market conditions led to tighter lending. As piston aircraft values subsequently surged due to strong demand and limited supply, lenders became more aggressive with competitive rates for quality aircraft.

Lender Competition and Specialization

The aircraft lending market is relatively small with fewer participants than auto or mortgage lending. However, competition among specialized aviation lenders can create opportunities for better rates. Some lenders focus specifically on aircraft financing and may offer better terms than general banks viewing aircraft loans as a small, specialized product line.

This is why shopping multiple lenders is crucial. Rate differences of 0.5-1.0% between lenders for the same borrower and aircraft aren't uncommon. Over a 15-year loan, a 1% rate difference on $150,000 represents about $15,000 in total interest savings.

Strategies to Secure the Best Aircraft Loan Rate

Improve Your Credit Profile

If you have time before purchasing, focus on credit improvement:

• Pay all bills on time—payment history is the largest credit score factor
• Pay down credit card balances below 30% of limits (below 10% is even better)
• Don't close old credit cards, as this can hurt your credit age and utilization
• Dispute any errors on your credit report
• Avoid opening new credit accounts in the months before applying
• If you have collections or late payments, consider whether paying them helps (recent items matter more than old ones)

Even modest credit score improvements can translate to meaningful rate reductions. Moving from 690 to 720 might reduce your rate by 0.5%, saving thousands over the loan term.

Maximize Your Down Payment

While 15-20% down is typical, putting down 25% or even 30% can qualify you for better rates. Calculate whether the rate improvement justifies the additional cash outlay. Use our loan calculator to compare scenarios with different down payment amounts and interest rates.

Consider the opportunity cost: what else could you do with that money? If alternative investments reliably return 8% and the rate improvement only saves 0.25%, keeping the money invested might make sense. But if investments are yielding 3% and you save 0.5% on the loan rate, the extra down payment works in your favor.

Choose the Right Loan Term

Don't automatically choose the longest term available. Run the numbers on 10, 15, and 20-year options. Can you comfortably afford a shorter term's higher payment? The rate savings plus dramatically reduced total interest often make shorter terms the better choice.

If you need longer-term flexibility, consider taking a 15 or 20-year loan but making extra principal payments when possible. Most aircraft loans allow prepayment without penalties. This gives you payment flexibility in tight months while still reducing interest costs over time.

Shop Multiple Lenders

Get quotes from at least three lenders, including:

• Specialized aviation lenders who focus exclusively on aircraft financing
• Credit unions, which often offer competitive rates to members
• Regional banks with aviation lending departments
• National banks with aircraft loan programs

Compare not just rates but also fees, terms, prepayment options, and service quality. The lowest rate isn't always the best deal if it comes with high fees or poor service. Our team at talk to our financing team can help you navigate multiple lender options and find the best overall package.

Consider Rate Buy-Down Options

Some lenders offer rate buy-down or discount points, where you pay an upfront fee to reduce your interest rate. For example, paying 1% of the loan amount upfront might reduce your rate by 0.25%. Whether this makes sense depends on how long you plan to keep the loan.

Calculate the break-even point: how many months until the monthly payment savings offset the upfront cost? If you'll keep the aircraft and loan beyond that point, buying down the rate saves money. If you might sell or refinance sooner, skip the buy-down.

Understanding Rate Quotes and Comparing Offers

When you receive rate quotes from lenders, make sure you're comparing apples to apples:

• Interest Rate vs. APR: The Annual Percentage Rate (APR) includes fees and is the true cost of borrowing. Compare APRs, not just interest rates.
• Fixed vs. Variable: Ensure you know whether rates are fixed for the loan term or variable and tied to an index.
• Fees: Origination fees, documentation fees, appraisal costs, and other charges vary by lender. A slightly higher rate with low fees might beat a lower rate with high fees.
• Prepayment Penalties: Most aircraft loans allow prepayment, but confirm there are no penalties for paying off the loan early.
• Rate Lock Period: How long is the rate guaranteed? Ensure it's long enough to close your purchase.

Don't hesitate to ask lenders to match or beat competitors' offers. The aircraft lending market is competitive, and many lenders will negotiate, especially for well-qualified borrowers purchasing desirable aircraft.

When to Consider Refinancing

Interest rates change over time, and your financial profile may improve after purchase. Refinancing your aircraft loan can make sense when:

• Market rates have dropped at least 1% below your current rate
• Your credit score has improved significantly since original financing
• You want to change loan terms (e.g., shorten term to save interest)
• Your aircraft has appreciated, improving your loan-to-value ratio
• You want to cash out equity for upgrades or other purposes

Factor in refinancing costs (typically $2,000-$5,000 for appraisal, title search, legal fees, and lender charges) when calculating whether refinancing makes financial sense. Read our detailed guide on aircraft loan refinancing to learn more.

Real-World Impact of Interest Rates

To illustrate how rates affect total cost, consider a $175,000 aircraft loan over 15 years at different rates:

• 6.5% rate: Monthly payment of $1,526, total interest of $99,680
• 7.5% rate: Monthly payment of $1,619, total interest of $116,420 (+$16,740)
• 8.5% rate: Monthly payment of $1,714, total interest of $133,520 (+$33,840 vs. 6.5%)
• 9.5% rate: Monthly payment of $1,812, total interest of $151,160 (+$51,480 vs. 6.5%)

A 3% rate difference costs over $50,000 in additional interest on a $175,000 loan—nearly enough to buy another aircraft! These numbers demonstrate why even small rate improvements matter and why taking steps to qualify for better rates pays substantial dividends.