Aircraft Loan Terms Explained: Amortization vs. Term

When reviewing a term sheet for an aircraft loan, you'll encounter two critical concepts that are often used together: the loan term and the amortization period. While they sound similar, they represent very different aspects of your loan structure. Understanding the distinction is essential for managing your cash flow and planning for the future.

What is Amortization?

The amortization period is the length of time over which your monthly payments are calculated. A longer amortization spreads the principal and interest payments over more months, resulting in a lower monthly payment. For aircraft, amortization schedules of 15, 20, or even 25 years are common.

Think of it as the payment schedule. A $500,000 loan amortized over 20 years will have a much lower monthly payment than the same loan amortized over 10 years.

What is the Loan Term?

The loan term is the actual length of time you have until the loan must be paid back in full to the lender. For many aircraft loans, especially on older or more complex assets, the term is often shorter than the amortization period. Common loan terms are 5, 7, or 10 years.

Think of it as the loan's expiration date.

The Balloon Payment: Where Term and Amortization Meet

When the loan term is shorter than the amortization period, the result is a balloon payment. At the end of your loan term, the remaining balance of the loan becomes due in one large lump sum.

Example: You take out a $500,000 loan with a 20-year amortization and a 5-year term.

• Your monthly payments for 5 years will be calculated as if you were paying the loan off over 20 years.
• At the end of year 5, the loan matures. You must then pay off the entire remaining principal balance.

At this point, borrowers typically choose to either pay off the balance in cash, sell the aircraft, or refinance the balloon amount into a new loan.

Why Do Lenders Use This Structure?

This structure helps lenders manage risk. A shorter term allows them to re-evaluate the asset and the borrower's financial standing at regular intervals. It protects them from being locked into a 20-year commitment on a depreciating asset. For borrowers, it provides the benefit of lower monthly payments thanks to the long amortization schedule, making aircraft ownership more accessible.