Last updated: • Not financial advice
How Interest‑Only (IO) Periods Work
Some lenders offer a temporary period—often 6–24 months—where payments cover interest only. Afterward, the loan converts to amortizing payments over the remaining term. IO can free near‑term cash for upgrades, entry‑into‑service expenses, or seasonal working capital.
Pros and Cons
- Pros: Lower initial payments; smoother onboarding (training, insurance, hangar); flexibility if revenue ramps.
- Cons: Higher total interest; larger step‑up when amortization begins; sometimes tighter underwriting.
Underwriting Considerations
IO requires confidence in future cash flows. Lenders scrutinize liquidity, reserves, and underwriting pillars. Some restrict IO on older aircraft or high‑time engines. Insurance, training, and maintenance plans help demonstrate risk control.
Plan the Step‑Up
Know your post‑IO payment. If you take 12 months IO on a 10‑year note, amortization is compressed into the remaining 9 years, increasing the payment. Use the calculator to approximate the step using two runs: (1) IO phase (interest‑only estimate), (2) amortization over remaining term.
Combining IO with Balloons
Operators sometimes pair an IO period with a balloon to keep payments lower while preserving an exit path (sale/refi). Ensure the balloon remains feasible under conservative resale assumptions.
Modeling Workflow
- Run a standard amortizing baseline (no IO).
- Estimate IO: payment equals balance × per‑period rate; track interest accrued.
- After IO, set remaining term and compute the new amortizing payment in the calculator.
- Compare total interest and cash‑flow profile; stress APR ±100–200 bps.
Case Study
A Part 135 operator adds a turboprop and expects utilization to ramp over 9–12 months. An IO period bridges ramp‑up while engine reserves accumulate. With strong liquidity and contracts in hand, underwriting approves a 12‑month IO followed by 9‑year amortization.
Structuring Variants
- Step‑down payments: Graduated payments instead of pure IO; may be easier on underwriting.
- Partial IO: Pay interest plus a small principal component to reduce the step‑up later.
- Shorter IO + longer amortization: Balance near‑term relief with manageable long‑term payments.
Tax Notes
Interest timing and deduction depend on use and entity. Consult a CPA experienced in aviation. Learn general principles in IRS Pub 535 and Pub 946. Industry primers from NBAA and financing resources at AOPA Finance are useful references.
FAQs
Are IO periods common?
They’re more common for business or larger balances and less so for smaller GA purchases. Availability depends on lender programs and market conditions.
Can I combine IO with a variable rate?
Sometimes, but budget for reset risk. Stress‑test with fixed vs variable comparisons.
Will IO hurt approval odds?
It can increase scrutiny on liquidity and documentation, but a strong file can still qualify.
External references: AOPA Finance · NBAA · IRS Pub 535