Reform to purchasing on credit

English Boards Suggestions and Ideas
1

Hi

I'm new to AS and obviously have been experimenting somewhat unsuccessfully for the last week or so. I quickly learnt that anything other than leasing is almost impossible for a new start up.

In AS when buying on credit the principle sum if kept constant for about 273 payments (based on a second hand aircraft I was looking at.

The aircraft was on the market for $20m with instalments of 75k and my rate was 2.25%. As the princple sum, 75k, was constant, this means at the start of the credit plan you are paying several times the principle sum in interest. By the last payment the interest is negligible and the payment is just over 75k.

Very few transactions take this form of credit agreement. It is much more common to face a constant payment of instalment+interest. This is easily calculated

This method actually means you pay a greater total sum for the aircraft but its much more efficient from a business sense.

Example

Aircraft: A320-200

List price: 21,018,151

Instalment: 76,797

Interest rate: 2.25%

Current system:

273 payments of 76k + interest of outstanding debt

Total payment of 93m

1st payment: 600k

Final payment: 80k

Constant repayment model:

273 payments of a constant amount of 473K

Total payment: 129m

You pay more as you are borrowing more money during the first periods of the loan, however constant payments are more manageable.

 The constant payment is easily calculated, Excel even has a function built in.

This system benefits the lender, (they make more money), and the borrower (by having more manageable payments at the start of the loan. Its also closer to real world finance.

Hell, you could even be given a choice of payment method.

This feature would add an additional element to the sim and give the option to move away from a solely leasing model. The only suggestion I would make, in order to prevent rapid over expansion is a deposit of maybe 25% to 33% of the value and obviously credit ratings and limits should be taking into account.

Any thought?

2

Either way, credit is still very expensive compares to leasing, especially during strong growth phase you are better off getting more planes than paying interest, and when you want to buy the plane you are better off buying the plane straight with cash. Off the three, leasing, cash or credit, credit is and will remain the most expensive and least advantageous way to acquire planes.

3

I think there are a lot of things around capital management that need soon or later some improvement. A more flexible credit system for aircraft purchases is just one of those. So yes, differentiating repayments not only on terms of their kind, but also in terms of length, would be a real nice-to-have.

As much as I know, it is one of the topics in the development pipeline, but not one of the short-term ones. Anyway, I agree with rubiohiguey, credit purchases are in general not the right way to go.

4

It's a multi-faceted issue. Just to name a few of those facets:

  1. Prices for capital should generally follow the market situation (prime rate). In AS, this situation is almost always extremely good...and so interest rates are also extremely high.
  2. Given #1, maybe not loans are too expensive, but leasing is to cheap. In the end, both are merely different means of financing an asset. The differences lie in the way they are treated on the balance sheet. So what I am trying to say is that both should actually cost more or less the same, with leasing actually being a bit more expensive due to the higher risk on the lessors side.
  3. Using annuities for our loans would definitely be an improvement usability-wise, but as jamiewt9 has already stated, they come with a severe effect on the total sum to be paid. When we reform the capital market component of the game, we might just switch both leasing an loans to the same base formula based on annuities (see #2).
  4. In general, leverage is a huge game-design issue. On the one hand, it is needed to get people started. On the other hand, the exponential nature of it is a huge problem. Just look at the extremely fast growth when game worlds start or how large companies can purchase new assets without even thinking about it because the money just magically appears through leasing or loans. This is a problem that reaches well beyond the capital market component alone and it's really a question of why the risk you face with these financing tools in reality doesn't have the same effect in the game. 

It's really something I would love to tackle asap, but it's immensely complex and still quite far away on our roadmap. So much to do...