BROUGHT TO YOU BY FLYING FINANCE
When most buyers start to think about aviation financing, they’re focused on interest rates and down payments.
Just like other kinds of financing, insurance, or lack thereof, will have an impact on your aviation loan terms. If you want to set yourself up for the best loan, you need to understand how insurance considerations directly impact your financing terms.
Much like how home and auto loans function, aviation lenders view insurance as their primary protection against loss. Your insurance profile can directly influence a lender’s willingness to lend and the terms they will offer in ways you might not even be aware of. Better insurability can mean better rates and terms, while insurance challenges will, in some cases, derail financing entirely.
Your lender is a partner in your aircraft ownership. They need assurance that their investment is protected, and insurance acts as one of their safety nets. The better that safety net looks, the more comfortable they’ll be extending favorable financing terms.
How Insurance Affects Financing Terms
According to Global Aerospace, there are a few key insurance factors that will affect your financing terms:
- Hull Value and Coverage Requirements
Lenders typically require hull insurance coverage equal to the loan balance, but the relationship between insured value and market value can impact your financing options.
If your aircraft’s insured value falls below the loan amount due to market depreciation, lenders may require additional coverage or adjust loan terms. This is particularly relevant if you’re financing a new aircraft rather than a lightly used one, since depreciation will hit a new model much harder on average.
For vintage or experimental aircraft, hull value disputes between insurers and lenders can create financing complications. Some lenders have specific requirements about approved hull value appraisals, which can add time and cost to your financing process.
- Liability Coverage Minimums
Most aircraft lenders require minimum liability coverage ranging from $1 million to $5 million or more, depending on the aircraft type and intended use. Higher liability requirements directly impact your insurance premiums, which affects your overall cost of ownership and debt-to-income ratios that lenders evaluate.
Commercial use, flight training, or charter operations typically trigger much higher liability requirements, which can significantly impact both insurance costs and lender willingness to finance.
- Pilot Experience and Training Requirements
Here’s where insurance and financing create a unique dynamic. Lenders often require that pilots meet specific experience minimums and complete approved training programs. These requirements are meant to reduce insurance risk (which in turn lowers premiums) and protect the lender’s collateral.
Low-time pilots will usually face higher insurance premiums, which can push debt-to-income ratios beyond lender comfort zones. Some lenders offer better terms when borrowers complete specific training programs that reduce insurance risk.
Red Flags for Insurability
Keep in mind that there are a number of red flags that can derail your financing opportunities, so beware if any of this applies to you:
- Previous Claims History
A history of aviation insurance claims can impact both insurance availability and financing terms. Some lenders have specific requirements about acceptable claims history, and higher-risk profiles may require additional down payments or co-signers.
- Non-Standard Aircraft or Operations
Experimental aircraft, warbirds, or aircraft used for commercial purposes often face both insurance and financing challenges. Understanding these limitations early prevents disappointment and allows for alternative financing strategies.
- Geographic Risk Factors
Insurance carriers impose geographic limitations and operational restrictions that can affect financing terms. If your intended aircraft use falls outside standard insurance parameters (such as mountain flying or operations from unimproved strips) both insurance costs and financing availability may be impacted.
Some lenders have specific requirements about approved airports or operational areas, particularly for higher-value aircraft or borrowers with limited experience.
Optimizing Insurance Costs for Better Financing Terms
Once you’ve determined your insurability, there’s still cost to consider. Insurance premiums inherently have an impact on the bottom line of financing calculations.
Aircraft insurance premiums are factored into lenders’ debt-to-income calculations. Higher insurance costs can push your total aviation-related expenses beyond acceptable ratios, potentially requiring larger down payments or affecting loan approval entirely.
If your insurance quotes come in significantly higher than estimated, for example, it might change your loan qualification or require restructuring your financing approach.
Some lenders prefer or require multi-year insurance policies to ensure continuous coverage. While these policies can offer cost savings, they also require larger upfront premium payments that might affect your available capital for down payments or other financing needs.
So, how should you optimize your insurance for the best financing terms?
For one, shop for insurance early in the process.
Don’t wait until you’ve found the perfect aircraft to explore insurance. Getting preliminary quotes based on aircraft types you’re considering helps you understand the true cost of ownership and can prevent financing surprises later.
Work with aviation insurance brokers who understand the financing implications of different coverage options and can help structure policies that meet both lender requirements and your budget.
Different lenders have varying insurance requirements and relationships with specific insurance carriers. Some lenders have preferred insurance partners that can offer better rates or more flexible terms for their borrowers.
At FLYING Finance, we refer clients to Ladd Gardner Aviation Insurance, but it’s okay if you have your own provider already, too.
Whoever you work with, they should be able to help you optimize your coverage structure. It can sometimes be worth the hassle of a higher deductible to reduce premiums and qualify for better financing rates.
And if you haven’t, consider the timing of policy renewals relative to your financing. You’ll probably want insurance renewal dates to align with your financial planning so you can have predictable cash flow.
Insurance as a Part of the Financing Process
In any case, you have to treat insurance as an integral part of your financing strategy rather than an afterthought. With proper planning and professional guidance, insurance can become a tool that enhances rather than complicates your aircraft ownership experience.
If you’re here bothering to read about aviation insurance and finance rates, I’d bet you’d rather be flying. The best way to quickly work through the nuts and bolts of aviation financing and get in the sky is to talk to a finance professional today.
FLYING Finance offers tailored loan plans that can accommodate a variety of usage needs. Reach out today to speak with one of our aviation financing experts.
