What Loan Variables Influence Monthly Payments

There are four impact levers influencing one’s monthly payment including the down payment, amortization period, interest rate and loan-to-value ratio (LTV). Let’s compare options by order of significance.

Down payment: The bigger it is, the smaller proportionally will be your monthly obligation.

Amortization period: the period of time over which the loan is paid back in installments.  Typically, where a relatively small down payment is made— 15 or 20%-- the longest amortization typically seen in these scenarios is 20 years. One way to reduce the monthly payment is by extending the amortization period. On a $100K loan, extending the amortization five years, say from 15 to 20 years, would save you nearly $1,600 in payments during the first year. 

Interest rate: For sake of comparison, using the same loan parameters, if the interest rate dropped 20%, say from five to four percent, you would only save about $600 in payments during the first year. The takeaway here is interest rate turns out to be much less significant a lever in terms of a reduction in monthly payments.

However, each option comes with other considerations. For instance, reducing one’s interest rate by 20% results in interest savings of almost $1,000 in just the first year. Also, by increasing the amortization period from 15 to 20 years, your loan balance at the end of the year is approximately $1600 higher.  LTV: the ratio of the loan as a percentage of the total appraised value is what calculates one’s down payment (typically 20% for loans under $100K; 15% for loans above $100K). However, LTV also determines what the standard term/amortization is as well as what other options might be available. 

This is the most powerful lever for giving you options. If a person has a strong enough LTV, they can have essentially “infinite amortization” in the form of an “interest-only” loan. Note, what this really means is interest only “for a limited time,” until the loan term matures. That limited time period is usually maxed out at five years, at which point a balloon would be due.

Why choose the interest-only option?

Historically the most common reason why people push for interest-only is to maximize a tax benefit, where there’s a known business use for the aircraft. For example, the person or the company can write off the depreciation of the aircraft and the interest expense of the aircraft. Doing so will allow them to enjoy the trifecta of low monthly payment, business expense deduction on the aircraft, and a potential tax deduction on the interest. However, in volatile stock market conditions (as currently exist), we tend to see another good reason for interest only loans especially on personal use/owner flown aircraft: to preserve cash flow and personal liquidity.  If the stock market, in the long term, generates an 8% return and you can borrow at 4%, so long as you have sufficient cash flow, borrowing on your aircraft instead of paying cash can theoretically generate an additional 4% return!

Great advice. Great rates. Great terms. All from helpful and responsive reps you can trust! 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 (800.627.5263) or click here to request a quote.

Adam Meredith
Adam Meredith
President of AOPA Aviation Finance Company
Adam Meredith, the longtime president of AOPA Aviation Finance Co., died after a long battle with cancer in December 2023. He is remembered for his passion for helping fellow pilots, leading a team devoted to putting flight training and aircraft ownership within everyone’s reach.
Topics: AOPA Aviation Finance Co, AOPA Products and Services, Ownership

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