What determines your solvency – Aviation Finance
A person who earns $ 1 million a year but has $ 2 million in debt is not necessarily a good credit risk. That’s why lenders look at your financial history in a number of ways. Think of these practices as those of a doctor who considers many factors in determining your physical health. Here are some things your lender considers about your financial health.
Credit score: Most people have heard of a credit score. There are several companies producing credit scores, but the most popular is the FICO score. (FICO stands for Fair Isaac Corp., the company that developed the score first.) With a single number, your credit score represents your creditworthiness. It just means: what are your credit bills and are you paying them on time? You might be surprised that your credit score doesn’t include your income in the calculation, just your credit and payment history.
Your credit score helps lenders determine their risk in lending you money. Specifically, a credit score helps them determine who qualifies for credit, what the interest rate should be, and what the credit limits should be. When it comes to scores, most credit scores range from 300 to 850. Your ideal credit score would be at least 720 and no less than 650. Just like altitude during an engine failure, more it’s high, the better!
DTI: Just as aviation has its own jargon and abbreviations, so does the world of finance. In this case, DTI stands for debt to income ratio, and it is an important factor when looking for a loan. Your DTI is the amount you owe on rent, mortgage, credit card payments, student loans, car loans, etc. in a given month. This number is divided by your gross monthly income (“gross” means your income before tax deduction) to determine your DTI. Typically, groceries, gasoline, utilities, and other monthly expenses are not included when determining your DTI.
Since lenders think your DTI is a good indicator of your ability to take on new debt, it makes sense to know yours. In order to calculate your DTI, add up these monthly payments as shown above and divide it by your gross monthly income. Typically, lenders like a DTI of less than 40% (including the proposed plane loan). Of course, the lower your DTI, the better your chances of getting a loan. If simple calculations confuse you, don’t worry: search online for DTI calculators, which are available for free.
Liquidity: When it comes to securing a loan, liquidity refers to the ease with which an individual can meet financial obligations with liquid assets (assets that can be quickly bought or sold without affecting the price).
Of course, cash is the most liquid asset, followed by money market funds, checking accounts, and savings accounts. From a lender’s perspective, this would all be considered cash. CDs, savings bonds, stocks, bonds, options, commodities, and other investments that can be sold through a brokerage account are considered marketable securities and slightly less liquid than cash. Illiquid (i.e. illiquid) assets would be objects such as art collections or rare books, stamps, wine, jewelry or coins. One of the most illiquid assets is real estate, be it personal or investment property, as converting a real estate asset into cash can take weeks or months. The most illiquid asset would be commercial interests. Valuations are very complex and subjective, and in a distress situation it would take a long time to turn into cash at what would likely be a significant haircut.
As you can imagine, you might be “rich” on paper owning $ 1 million worth of artwork, but without cash or marketable securities you would be struggling to meet your financial obligations and therefore be too risky to take. most lenders. What you need to know when considering buying an airplane is that a lender will usually want you to have enough liquid assets to cover the down payment and six months of your loan repayment. If you are self-employed or have irregular income, your need for cash will likely increase. This is not to say that exceptions cannot be made, however, money is king!
Unsecured debt: When the debt is “unsecured” it means that there is no property or equipment attached to a debt as collateral. For example, your mortgage is secured debt in the sense that if you don’t pay your mortgage, the bank can recoup its losses by foreclosing on your house.
Since unsecured debt carries a higher risk for the lender, the interest rate is higher than for secured debt, resulting in more interest. If you have a lot of unsecured debt, you will have high monthly interest charges, hampering your ability to pay other bills such as your plane loan. Keep unsecured debt to a minimum, don’t live beyond your means because of credit card fees.
Understand your creditworthiness: These are the ideal characteristics for each of the four different areas of credit that a lender will look at. If you are on the limit in all categories, you can expect it to be difficult to get loan approval, and the stronger you are in any of the categories, the more likely you are to get. the best options.
At AOPA Aviation Finance, we understand that obtaining an airplane loan can be a daunting process. Our goal is to make it easier for our members to finance their planes. If you have any questions about the credit approval process, or if you need help understanding and analyzing your financial situation, let the experts help you. Our experienced team of savvy aviation lending experts are ready to discuss your unique situation.
Very good advice. Excellent rates. All with helpful and responsive representatives you can trust! Three good reasons to turn to AOPA Aviation Finance when buying an aircraft. If you need a reliable source of funding with people who are by your side, just call 800.62.PLANE (800.627.5263) or click here to request a quote.