Insurance + Banks, questions?

[Becca]

So we had hail damage on our plane a couple years ago, and we held off getting our claim actually paid out due to the lack of availability of Mooney parts.  Now that they are available, we're dealing with the claim.  It involves buying new control surfaces and getting a re-paint.  The insurance company was awesome and very easy to deal with and gave us a full cash settlement based on full estimates, and because we are willing to put in some of our own elbow grease, their cash settlement is definitely more generous than the cost of repairs will be, leaving us with some money in the bank.

We have a small loan on our airplane (its about the size of a car loan) for a variety of reasons (partnerships can be complicated).  So the insurance check is going to be cut to us and the credit union as the lien holder.  We were unable to go with a more traditional aircraft loan servicer because many had unreasonable closing costs/interest rates for such a small loan at the time we got our loan.  Unfortunately our credit union has very little experience dealing with airplane loans and treats us like we are running a corporate jet charter business or something not buying something the expense of a midrange sports car.

Anyway, our credit union's first position is that we do the work at our own expense, submit them the receipts when the work was fully completed and they reimburse them from the insurance check and then send the remainder of the check back to the insurance.  I told them no way, we needed money up front to buy parts, as the paint job will come several months after parts purchase, and they said they can accommodating releasing funds from the check for parts purchases.  And also that we wanted to keep the difference (and the insurance company considers the matter closed once they cut the check).

So then they said if there was any money left over they'd apply it against the balance of the loan rather than just returning it to us in cash, which we don't want either but they seem pretty much unwilling to negotiate on this. The VP of the credit union's position is that damage devalues things, and therefore it is their way of buying down risk.

Any experience with this?  In their records, the loan is for 80% of the value of the airplane which makes them very protective of "their" asset, but we've significantly upgraded the airplane since purchased and now the loan is more like 40% of the value of the plane if you consider its value (probably 30% of the value of the airplane once it gets repainted with this hail damage).  Do you think if I got the airplane re-appraised they'd be a little looser with the money?  Or do you think we have to actually refinance to get that money back?  Is there some magic words I can use here or strategies other have used?
 

 

[N601RX]

Credit unions operate in a very regulated environment and don't have much flexibility. I ran into the same issue with a car that was financed at a credit union several years ago.   I ended up writing them a check for the amount of the loan and then telling them to endorse the  insurance check over to me.  From the look on the persons face I don't think anyone had done that before. He 1st told me I couldn't do that, but after a discussion with the manager decided they could.

 

It may take a few weeks to get in place, but look at some alternative loans that don't use the plane as collateral.  A 401K loan can be a ok option in under some conditions.  A loan against a  CD is what I have my plane on.  I'm currently paying 3.25%.  If you have any other property that is clear it can also be a good option to use as collateral instead of the plane. These type loans usually have little to no set-up fees.

[Cruiser]

sounds like they think you are scamming the insurance company.

[KSMooniac]

I would tell them to do something anatomically impossible and refi the plane with a better lender.  I generally like my CU, but they wouldn't consider financing my plane, or refinancing it 5 years later, despite the fact they loan on big-ass RV's, boats, and other mobile, quickly-depreciating toys.

[thinwing]

Hey Becca..a third possibilty is to not repair the hail damage at all...if the insurance check is large enough...how about paying off the note altogether...flying the a/c as is and start looking for used control surfaces to be replaced little by little out of funds normally used to make the loan payment

[jetdriven]

The aircraft is in a "unrepaired aircraft" database which means it is not insured against further hail claims, and at the last renewal, only our current insurer would quote us. I hear rumors of Chartis leaving the aviation market, which means we likely cannot insure it next year.

 

If we repair it and document this in the logs, it undoes this mess.

[thinwing]

So you in order to get any insurance at all,you have to repair the hail damage now???

[jetdriven]

We must have a repaired aircraft in order to get insurance from anyone but Chartis when the policy expires in January.  Chartis, I hear, is leaving the aviation market.

[clh]

Is it possible to get the bill, pay the bill submit the bill to the bank, get reimbursement?  It means that you would have to front the cash for the paint job.  Or maybe it would just be better to pay the loan and get a new loan for the paint.  

 

This is why I never finance anything if possible. I detest dealing with banks.. 

[FloridaMan]

I couldn't get financing on my aircraft because of an unresolved loan from 43 years ago. I figured out a way to margin my securities at a lower interest rate and paid that off. Getting turned down was a real blessing. You'd think that being a certificated pilot and an aircraft owner would give you some points for integrity. It certainly works socially and professionally -- and, as a group (and I may be biased), and while pilots tend to be more bold than most people, they comprise the best group of people I've met. You can't bullshit your way through flight training and into a high performance aircraft like some people can bullshit their way through med school. Or, to put it another way, I've met a lot more douchebag doctors (pilots excepted) than I have douchebag pilots. 

[jetdriven]

Hilarious!

[carusoam]

Similar to what Antares is saying...

Refinance the house, use excess cash to by plane parts and pay down the note on the plane....

Interest rates on the house is better than on the plane.

Money is fungible. Get the loan with the lowest price and spend it on what you need. then have the insurance pay on the full repair bill.

My bank showed me this. Their jet loans were a minimum of $1MM and at higher rates. The Mooney was neither a jet nor that expensive? So they refinanced my house to pay for the plane.

Bank of America is an excellent source of plane financing that helps the average plane buyer through change of ownership. You won't need this kind of protection since you own the plane already

Your creativity may be required because you have a non-family partner or your house doesn't have enough equity.

Any questions?

-a-

[Becca]

Similar to what Antares is saying...

Refinance the house, use excess cash to by plane parts and pay down the note on the plane....

Interest rates on the house is better than on the plane.

Money is fungible. Get the loan with the lowest price and spend it on what you need. then have the insurance pay on the full repair bill.

My bank showed me this. Their jet loans were a minimum of $1MM and at higher rates. The Mooney was neither a jet nor that expensive? So they refinanced my house to pay for the plane.

Bank of America is an excellent source of plane financing that helps the average plane buyer through change of ownership. You won't need this kind of protection since you own the plane already

Your creativity may be required because you have a non-family partner or your house doesn't have enough equity.

Any questions?

-a-

[Becca]

Plenty of equity in house but its already at a low apr and refi'ing will extend the loan term and cost approx $4-5k in closing costs, that's hardly a smart solution. houses in houston are very very cheap compared to national average and never appreciate in a meaningful way, so even if you refi to the entire value of house you have to save a lot of interest to make up for those closing costs. Also by rolling the plane loan into the house the interest rate may be low but not you have that loan on a term of 15-30 years - even 3% interest starts adding up on a term like that. We more considered would be to take a larger loan on our cars, car loans are at 1.74%, and even without the tax breaks of home loans, that's really low. But our bank offers a 2.3% 5 year loan ln planes, so thats not much of a savings compared to a car and keeps the loan in the partnership. But I think in the end we will work with stupid bank and just refi plane to get our cash back out when this is all over.

[carusoam]

Becca,

The steep buyin cost of the loan seems unusual. I used bankrate.com for finding competitive numbers. I think you may be referring to points as part of the closing cost.

Shortening the term of the loan does a nice job of dropping the interest rate.

The other nice thing about the home loan is that it can be paid off early without a penalty.

Essentially you take a loan that pays for the things you want, and pay it off in a time frame that works for you.

I think this works because the combination of 747 pilots, engineers and home owners have above average financial capabillities.

So closing costs on the new 0 points loan will be about $1k.

I am not a financial expert, and house prices are about the same in NJ as they are in Houston (you just get more house than we do)

Next step: go to bank rate.com and look up 15 vs 30 yr, fixed rate, 0 points loans for your neighborhood.

It just doesn't always make sense to finance the plane even though you are using the money directly on the plane. Essentially it is your money. Whether it comes from the front pocket or the back doesn't matter. The IRS and the bank would prefer the money to come from the pocket marked "home"

Hope this is helpful. My financial experience comes from helping customers finance process machinery. Check with your local experts for precise financial advice. This advice will not necessarily be helpful for young people, fresh out of school, with a new mortgage with kids in daycare...

Best regards,

-a-

[WilliamR]

Please do not take this as professional financial advice as I do not work in the retail finance business, but rather in corporate and investment banking.  I think you have two issues given the CU’s initial response. 

 

The first issue is the short term liquidity crunch of needing to purchase parts.  To that need, it seems like the CU is willing to work with you.

 

So, the next issue is that the CU wants to use any difference between the insurance payment and what the cost of repairs is to pay down the loan.  I think what you wrote was that this difference is equal to the labor you will provide.  If you are using a shop or an individual A&P to sign-off the work you provided, why couldn’t that entity provide a bill or include in their bill the cost of labor you complete?  In essence, you would be a labor provider to the maint. shop. The funds are being released directly to you, so you would pocket the amount associated with your labor with the remainder going to whoever purchases the parts.  In no way could this be considered fraud.  From reading, it appears you often work on your airplane either as an A&P or presumably under the supervision of an A&P/AI.  Many shops use labor from non-A&P mechanics.  Airlines to the smallest maintenance facilities do this all the time.  If you’re the A&P signing off the work and ordering parts, it’s an even easier process.  The point is, your labor has billable value whether you’re an A&P or not.  This may be oversimplifying the issue, but I think it right on.  Generally, I have found retail bankers today have little knowledge and therefore are not very flexible when presented with logic.  At many large bank branches, bankers/lenders are not even required to have a college education.

 

If the CU is unwilling to help on the first issue, I do agree refi’ing your house to pull out equity to solve a short term liquidity need is not ideal given the closing costs.  FYI, my refi closing costs last month were half what you stated, but then again, I am a simple banker in a simple house.  Could you instead find a basic unsecured loan with little upfront costs and no pre-pmt penalty?  Again, you are trying to solve a short term liquidity issue so you should not be very rate sensitive.  Even if the rate is high, the duration would be very short.  If you financed $20,000 at 14%, using a 360 basis, you would be paying about $7.75/day for that short term liquidity. 

 

If you simply just want to get out of this CU loan for other reasos, well, there are many options that people have presented.   

 

Hope this helps.

 

William

[Becca]

Though I am unwilling to refinance the house for the airplane, I would refi for other reasons if I could get a refi with lower closing costs which you both seem to have gotten.  I have tried bank rate, several big banks, my current mortgage holder, my credit union, a mortgage broker and several online sources and have never got a quote with <$3000 in closing costs (no points) from any of them.  This seems in line with what my peers are paying here on closing costs.  Maybe closing costs in Texas are just higher?  Or higher because of the low value of the mortgage?  Any other suggestions on what I'm doing wrong here? 

[Marauder]

Becca -- it just feels to me that the CU, being the lien holder, feels they are entitled to their share of the proceeds from the insurance claim. Is it possible that you work with an authorized repair shop or independent mechanic and have them submit a bill that matches the proceeds of the insurance claim and you pay them for the portion of their effort? You would be sub-contracted for providing the required materials and labor. If you cannot afford the material cost, pay them an uplift for their handling portion of this activity (cost of their money). The bill would be reflective of the usage of their facilities, "technical" services, parts acquisition or any other activity that matches your settlement claim. You do the work under the auspices of the authorized repair shop or mechanic and they submit the bill on your behalf. They can make some money for their effort. Obviously, you need a trusting relationship with the shop or mechanic to be reimbursed for your costs and labor. You are caught in a rough spot with the CU.

[carusoam]

Becca,

I would expect the loaners are going to try every avenue to make their share. Closing cost must be it lately, since interest rates are at a lifetime low.

Interest rates seem to be increasing with improvement in the housing market.

The fixed rate home equity loan is also a viable method of covering your needs. Low rates, costs and variable terms. Watch the terms page, you may not be able to pay this off early without a penalty...

----

Again, to be clear, I am an amateur at a financial issues. Check with your CU or bank to see if these methods meet your requirements.

Advice for everyone... Avoid getting loans on your house so you can afford to fly. Losing part of your income stream CAN Lead to the loss of your house. That Would Be BAD.

Use fixed interest rate loans. Avoid variable interest rate loans when possible. These are personal financial dynamite.

Ymmv.

Best regards,

-a-

[RocketAviator]

Becca -- it just feels to me that the CU, being the lien holder, feels they are entitled to their share of the proceeds from the insurance claim. Is it possible that you work with an authorized repair shop or independent mechanic and have them submit a bill that matches the proceeds of the insurance claim and you pay them for the portion of their effort? You would be sub-contracted for providing the required materials and labor. If you cannot afford the material cost, pay them an uplift for their handling portion of this activity (cost of their money). The bill would be reflective of the usage of their facilities, "technical" services, parts acquisition or any other activity that matches your settlement claim. You do the work under the auspices of the authorized repair shop or mechanic and they submit the bill on your behalf. They can make some money for their effort. Obviously, you need a trusting relationship with the shop or mechanic to be reimbursed for your costs and labor. You are caught in a rough spot with the CU.

Sounds remotely familiar!!!! a Byron!

[Marauder]

LOL! 

[Alan Fox]

Becca , you have a contract with the finance co , unless this is specifically spelled out in the contract , they are commiting consumer fraud, and possibly bad faith....If you have a friend who is an attorney , you should talk to them about it.....Fraud carries treble damages , and a fee shift(attorneys fees) They dont want to go there .....Do your due dilligence.... Regards Alan....

[Cruiser]

Becca,

 

have you checked with AOPA? Seems they have a new financing arm. "

 

The new service, AOPA Aviation Finance Company, LLC (AAF), will offer more flexible financing options through a collection of banks"

[carusoam]

The relationship between B of A and AOPA worked well...

BOA was reccomended to me by AOPA. The finance group at BOA really new private planes, not just jets...valuation, registration and logs.

Plane financing at the time was 6%, compared to home financing at 4%.

Just additional data points and best regards,

-a-