Can I get a loan?

[Todd]

Hi guys,
I've been lurking here for a while but finally had a question to ask. I'm interested in building an RV-8 180hp/CS. I'll obviously need a loan if I want to do this. Here's my question, I'm 21 yrs old tomorrow (already have a VP-1 under my belt and partially completed W-10 Tailwind which I sold after realizing how not fun steel is to work with),and have been working as a retail clerk at the same location for about 3 years. I was in an accident in 2nd grade which the other party's insurance settled with us for $40,000. Unfortunatly I get the money in $5,000 payments every 6 months starting when I turn 21(tomorrow). I'd like to get the money upfront (loan) so I can get going on the project but I'm not sure If I will be approved for one due to my age and not having too much credit history. I was hoping the $40,000 would act as a good asset to the loan company. Does anyone have any ideas? Thanks! -Todd

[Jamie]

Todd:

Wow..your first post! Welcome!

Generally the loan companies want something like 20% down. Most folks that get loans need them to finish the airplane and they use the airframe cost on the down payment and the remainder of the project as collateral.

If you're going to be getting $5K every 6 months, you can definately do the slow build without a loan. In fact, I think that's a nice steady pace. It took me a little over 6 months for slow-build wings and about the same for the slow-build fuselage.

If you're going to get a loan, I would wait until you have the airframe essentially complete. This is the sure-fire, most economical way to do it. If you get the loan now, you're going to be paying interest on the loan for two more years and you'll have the problem of providing a down payment and collateral. Also, if something happens during construction and it puts your project on hold, you won't have the loan payment on your mind. You can just put the project on hold and come back to it when able.

Just my humble opinion.

Best,

[TShort]

5K$ every 6 months is perfect for the slow build ... the first 5K for the tools and empennage, then about when that's done you've got the cash for the wings, etc. You shouldn't have to take a loan for a while...

I would also avoid going into debt if possible - why pay interest to a bank if you've got that $ coming in?

T.

[mdredmond]

Not that it's any of my business and you don't need to address it here, but I hope that $40k has been earning interest for the last 15 years. You should have roughly three times the original amount by now.

I agree with the last poster. Use the money coming in to do a slow-build. I'm doing something similar. I'm paying as I go (have tools, tail and wings) and will decide in the end whether to take out a loan for the engine or just buy one.

[Spizzzarko]

5k a month will sure buy a lot of beer! That's what I was thinking when I was 21.

[RV7Factory]

Todd,

Let me play a little bit of devil?s advocate here. It sounds like you are not talking about spending the incoming funds on the -8, but rather using it as collateral towards a loan. This is good in that at least you aren?t talking about spending the money on the kit (at least I hope not). I know this wasn't in the spirit of your original question, but based on some of the responses I feel compelled to provide my $.02.

You are a YOUNG guy, and when it comes to $ that means you have one huge advantage? time! What I am getting at here is the concept of the time value of money. You?ve got a nice chunk of change coming in, but do yourself a favor, resist the urge to spend it on discretionary items such as an airplanes or fancy cars. Instead, save it, invest it, buy something with some tax advantages (e.g. home), but as hard as it is for me to say this, don?t waste it on a toy (RV-8) at this point in your life. Make your money work for you now (at a young age) and you will have a lot more long-term choices.

If you aren?t financially savy, and you have sizeable lump sum coming in, please seek professional help. Consult a certified financial planner, in the long-term you will probably find that it was the best investment you've ever made.

Good luck!

[mdredmond]

Brad - I wanted to say the same thing, but didn't want to sound patronizing. I agree. A chunk-o-change like that (especially if it's been growing) left alone could fund a good chunk of his retirement.

He's 21, and assuming he'll retire at 65:

40k at 8% for 44 years = $655,248.67 in a taxable account, or $1,182,238.87 in a tax exempt or tax-deferred account.

If it's been earning interest and say he's got $100k coming:

100k at 8% for 44 years = $1,638,121.68, or $2,955,597.17 in a tax-exempt or -deferred account.

The above not adjusted for inflation.

My advice: move as much as possible every year into a Roth IRA. Then max a 401(k) every year, even if it means living on some of the lawsuit income.

[Todd]

Thanks for the warm welcome and quick replys guys. I'll try to address everyone one by one-
Brad- I had planned on using the 40k Im getting to fund the project with a loan to help cover the engine, prop, etc.. However saving the money and getting a loan to cover the entire cost is something I had not considered. I would like to get as small of a loan as possible though so I may just get a loan to cover the engine etc and use the kit as collateral. I was bitten by the homebuilders bug(nasty thing that is) and have been twiddling my thumbs looking for something to build ever since I let go of my Tailwind. I know the project may not make the most financial sense at this age, but perhaps due to my youth I see this money as something I can have fun with yet still investing it in something worth while..ie not beer and girls
Jamie/Thomas- I think your right. The 5k every 6 months should cover the airframe nicely.
Matt- Unfortunatly when insurance settled with us I was 7 or 8 years old and didn't know that we got any money(got bit by a family friends dog, we didn't sue, their insurance called us one day and told us they were going to give me some money! good deal) My mom set up the payment schedule over 10 years ago so I'm afraid its too late to do anything about interest. I did ask her about interest and she said she worked it so I got the most possible
Thanks again for the help everyone. I think I should be able to hold off on the loan for a while. Todd
I almost forgot-I had planned on spending the money on college but I'll be going into Navy ROTC this spring so they'll cover the bill for school.

[mdredmond]

Todd, back to your original question...

One of the easiest ways to get a loan with little credit history is this:

Stick a chunk of that money in a CD at your bank (yes guys, CDs are terrible, but it needs to be a CD in this scenario). Take out a loan for the amount of the CD, secured by the CD. Put the proceeds of the loan into an interest-bearing account at the same bank, set up with automatic payments toward the loan.

You're basically depositing money, borrowing your own money back, and building a payment history. The bank will report the loan performance to the credit bureaus.

After making some dumb financial mistakes (at your age), I did exactly this to start my credit 'repair'. It was easy sailing after about six months of the above. My bank charged the CD rate + 2% for the loan, so the net cost was pretty low.

[Todd]

Matt, just got your reply after I posted that last one. Wow... Thats a lot of free money I could get. Maybe I should look into putting that money into a long term savings account and getting a loan for the project. I wonder if the 40k could act as collateral on a loan?