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Lease vs. Loan: the Things You Should Know

by David Wyndham 1. July 2007 00:00
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In simple terms, a loan provides you ownership from the start. You borrow money and provide either the aircraft as collateral, or some other tangible assets such as s stock portfolio.

In a lease, the owner (lessor) allows another the use of an aircraft for a fixed period of time or at will. The lease most of us are familiar with is called an operating lease. An operating lease is a lease whose term is short compared to the useful life of the asset. For example, an aircraft which has an economic life of 30 years or more may be leased to an operator for 5 years on an operating lease.

There are two major differences between a lease and a loan.

With a loan, you assume the full residual value risk of the aircraft. If the value of your aircraft changes, you either benefit or lose. With a lease, the lessor assumes that risk. Owners that tried to sell their aircraft in 2001 - 2003 saw a significant loss in value over what they anticipated. Today, sellers of popular late model turbine aircraft may see some appreciation in value compared to a few years ago.

With a lease, the lessor owns the aircraft and can take advantage of tax depreciation. With a loan, there may be tax advantages if the aircraft is for business use, but personal use and mixed use will severely limit (or eliminate) any tax advantages. If tax depreciation is not needed, a lease may be the way to go

Leasing may be less capital intensive than a loan. Down payments for loans are generally greater than the upfront costs associated with a lease. This may be especially true for new models, but deals can be made.

With a loan, you can sell the aircraft before the loan in finished. There are rarely penalties except that you must pay off any remaining balance. Early exits from a lease can be costly as the contract may require you to pay the remaining lease payments.

Leases have return conditions. When returning an aircraft from a lease, you must return it in some pre-agreed state of condition. You will pay for returning the aircraft in less than contracted condition. Loans may require the aircraft be maintained in an airworthy condition, but as the owner, you assume the risk of the aircraft being worth less than the balance loan amount.

It can be tough find leases for older (20 years +) aircraft. A leasing company needs to ensure a reasonable service life remains on the aircraft. The leasing company also has to plan on being able to sell the aircraft after the lease in a relatively short time. New and late model used aircraft tend to be leased more often than older aircraft.

In general, leases work well for operators who do not need tax advantages, want minimal down payments, and plan on turning their aircraft over for new ones every few years. With leases longer than about seven years, you'll likely pay more than if you had a loan. Lease terms may be more favorable for new aircraft as many manufacturers offer lease (and finance) programs for their new models.

Loans work well if an operator uses the aircraft for business use and can take advantage of the tax depreciation. Loans also work well if the owner plans on keeping the aircraft more than about seven years. Some institutions get creative with long term loans that have balloon payments due at the end making the typical loan payment less than the short term lease payment. Provided the down payment isn't excessive, you may be able to borrow more aircraft than you can lease.

You need to evaluate both options and, if business use is involved, talk with your tax and legal advisors. This article touches on the two options, but "the devil is in the details" - read your contracts carefully.

Lease or loan - what experiences have you had with either or both?



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