How to Read an Aircraft Loan Term Sheet: Terms to Check Before You Sign

What is an aircraft loan term sheet?

A term sheet is the lender's short summary of the deal it is willing to consider. It comes before the full loan agreement and security agreement, and it sets the frame for both. It typically names the borrower and any guarantor, the amount, the rate, the term, the amortization, the collateral, the fees and the conditions that must be met before closing.

Read it as a map of the final documents. Anything vague here tends to become a negotiation later, and anything missing may show up for the first time in the loan agreement. If you are still collecting your own paperwork, start with what to prepare before applying for aircraft financing, and for the bigger picture see the airplane financing guide.

Formats vary widely between a bank, a specialty lender and a lessor, and some lenders skip a formal term sheet on smaller piston deals. Use the sections below as a checklist rather than a template.

How is the loan amount set?

The amount is usually a percentage of a value, not a fixed number. AOPA Aviation Finance says lenders will base financing on either the purchase price or the appraised value, whichever is lower, and that the value is checked against benchmarks such as Vref or the Aircraft Bluebook. That means a low appraisal can shrink the loan after you have signed a purchase agreement. For how the appraisal works, see what an aircraft appraisal covers.

Look for three things on this line: the percentage financed, the value it is based on, and what happens if the appraisal comes in low. Then compare the implied down payment to your plan using aircraft loan down payment requirements and the aircraft loan calculator.

What is the difference between term and amortization?

The amortization is the schedule used to calculate your payment, and the term is when the full balance is due. AOPA Aviation Finance says airplane loans typically amortize over 15 or 20 years, and calls a loan fully amortizing when the term and amortization match.

When the term is shorter, a balloon payment is due at maturity. AOPA gives the example of a 20-year amortization with a five-year term, which leaves the remaining principal due as a lump sum at year five, and says lenders can structure balloon terms out to 10 or 15 years on a 20-year amortization. AOPA adds that a balloon loan may carry a slightly better rate. The trade-off is refinancing or payoff risk at maturity, covered in balloon payments on aircraft loans.

Is the rate fixed or floating, and when is it set?

A term sheet should say whether the rate is fixed, floating, or fixed for an initial period, and the date it is set. A rate quoted today may be indicative only. If it floats, find the index and margin and when it resets. Compare any quoted figure with published aircraft loan rates and read fixed vs variable rate aircraft loans before you pick.

Ask whether the rate is locked at the term sheet, at commitment or at closing. A gap between those dates is where rate risk sits.

What does the term sheet say about paying off early?

Look for a prepayment penalty or make-whole clause. AOPA Aviation Finance says not all lenders charge a prepayment penalty, and that where one applies it generally runs somewhere between the first six months and the first 36 months of the loan. AOPA also says most lenders allow extra principal payments during that period as long as the loan is not paid in full.

The wording matters: ask what triggers the fee (a sale, a refinance elsewhere, a partial paydown) and whether it is a fixed percentage or a variable amount. The full explanation is in prepayment penalties on aircraft loans.

What restrictions can a lender put on how I use the aircraft?

These are the clauses most often skimmed and most likely to bite. In an AvBuyer report on how financing agreements can limit jet usage, lenders and advisers described several kinds of limits:

• Geography. PNC Aviation Finance said it restricts where the aircraft can operate or be stored, for example to avoid sanctioned countries. Global Jet Capital said a lender may limit which countries the aircraft can fly to.
• Hours. Global Jet Capital said lenders may cap annual hours or total hours through maturity.
• Charter and commercial use. A NAFA spokesperson said lenders can specify private (Part 91) or commercial (Part 135) use in the US, often in the security agreement. AOPA Finance said a Part 135 plan almost always affects the lender's decision, and that many lenders accept limited charter use capped by hours or a percentage of annual use.
• Maintenance and modifications. Lenders may require an engine maintenance program and may limit modifications that change the aircraft's function, according to the lenders quoted.
• Reporting. Lenders typically get maintenance tracking reports before closing and can request them during the loan, per the NAFA spokesperson. Some loans carry a loan-to-value covenant comparing the aircraft's value to the outstanding principal, according to Global Jet Capital.

If you operate or plan to operate for hire, compare the clause with your plans before you accept the term sheet. See financing a Part 135 charter aircraft for how lenders view commercial use. Global Jet Capital also noted that in a default a lender may impose further restrictions, including grounding the aircraft, so know what counts as a default.

What insurance and collateral does the lender require?

Expect a lien on the aircraft and insurance conditions. AOPA's purchase and delivery checklist says lenders typically require you to maintain full ground and flight insurance, plus breach of warranty coverage, for the loan amount, with a carrier acceptable to the lender. It adds that the lender must be named as loss payee and protected by a lien holder's endorsement.

The lien is perfected by recording it. The FAA Aircraft Registry explains how security agreements are recorded, and how aircraft title, liens and escrow work at closing walks through the closing steps. For aircraft that qualify, the lender may also register its interest on the International Registry, explained in the International Registry and Cape Town Convention.

Who guarantees the loan, and what fees apply?

Check whether the term sheet requires a personal or corporate guarantee, especially if the borrower is an LLC. A guarantee extends your exposure beyond the aircraft; personal guarantees on aircraft loans explains what to negotiate. List every fee as well: origination, documentation, appraisal, title and escrow, and any fee that applies if the deal does not close. Ask who pays each one and when. Do not assume fees; the term sheet should state them.

What should I check before signing a term sheet?

1. The loan amount, the value it is based on, and what happens if the appraisal is lower.
2. The term, the amortization, and the estimated balloon, if any.
3. Fixed or floating rate, and the date the rate is set.
4. Prepayment penalty or make-whole terms, and what triggers them.
5. Use limits: geography, hours, private versus charter, maintenance and modifications.
6. Insurance requirements, loss payee status and collateral.
7. Guarantees, borrower entity and every fee.
8. Conditions to closing, expiry date, and whether the sheet is binding.

Run the numbers on the base case and on a worse case using the aircraft loan calculator. For legal effect and any binding language, have aviation counsel review the term sheet and loan documents; this article is general information, not legal or tax advice.

When your numbers and plan are ready, you can start a deal file with JetFinex to organize the documents lenders ask for.

Frequently asked questions

What is a term sheet in aircraft financing?

It is a summary of the main terms a lender proposes before full loan documents are drafted. It usually covers the borrower, any guarantor, the amount, rate, term, amortization, collateral, fees and conditions. The signed loan agreement and security agreement control, so compare the two.

Is an aircraft loan term sheet binding?

That depends on its wording and on counsel's reading, so do not assume either way. Many term sheets state that they are non-binding and subject to credit approval, appraisal and documentation. Have aviation counsel confirm what you are agreeing to before you sign anything.

What should I check first on an aircraft loan term sheet?

Start with the loan amount and what it is based on, then the term and amortization, because a gap between them means a balloon payment. AOPA Aviation Finance notes lenders finance on the lower of purchase price or appraised value, so a low appraisal can change the amount.

Can a lender restrict how I use the aircraft?

Yes. Lenders quoted in AvBuyer describe limits on geographic operation, annual or total hours, and private versus charter use, often set out in the security agreement. If you plan Part 135 flying, raise it before the term sheet is issued.

Sources

• AOPA Aviation Finance, Understanding loan terms: amortization, term, balloon, prepayment penalty
• AOPA Aviation Finance, Demystifying the aircraft loan process
• AOPA, Turbine finance: purchase and delivery checklist
• AvBuyer, How could financing agreements limit jet usage?
• AOPA Aviation Finance, Why does the lender want prepayment penalties?
• FAA, Aircraft Registry: recording a security agreement

This guide is educational and is not tax, legal or investment advice. See our editorial standards and disclosures. Spot an error? Tell us.