How to use bank loans

[JumboShrimp]

1. Don't use loans !!!!!
2. If your strategy calls for using loans to finance purchasing (not leasing) of aircraft, don't use that strategy
3. If you really, really need a loan, be aware of the fact that 13.59% of the principal of the loan will have to be paid in Bank Fees.  No matter the term, it is always 13.59%
4. Want to "save" buy paying the loan early?  Absolutely the worst idea.  There is no avoiding the 13.59% in Bank Fees.  All the Bank Fees for the rest of the loan will be due, plus Early Loan Termination Penalty.
5. Need a short term loan for a week?  See #3, (13.59% of the amount borrowed lost on repayment) and #4 Early Termination Penalty will apply (more of the loan money lost).  One week round trip will cost something around 800% interest rate equivalent on the amount borrowed.
6. "But I am AAA rated, my borrowing rate is low".  Bank Fees will likely cost more than the interest paid, on short term loans.  Your credit rating does not really matter very much.  See #9
7.  "Is it ever a good idea to prepay a loan?" Only if you are 100% certain that for the rest of the life of your airline, you will never have to use loans again.
8. "If I really, really need a loan, what kind of loan should I get?"  The longest possible, 6 year.  It is far better to have cash on hand, pay interest than to make 2 or more round trips to the bank.  On every round trip, you lose 13.59%.  When using loans in AWS, interest is your friend, Bank Fees are your enemy. 
9. "If Bank Fees were interest, what would the rate be?"  On a one year loan, the bank fees are an equivalent of approximately 25% interest rate (on top of regular interest rate).  On longer and longer term loans, the rate is lower and lower.  Another reason to take the longest term loans, if it is possible there will be need for loans in the future.

[LemonButt]

I'm not so sure why you are so obsessed with loans lately, but saying don't use loans is the worst advice ever.

You are comparing AWS loans to the real world where there are options and opportunity cost.  Need cash in AWS?  Using a loan costs X percent and is expensive.  Don't want to use a loan?  Then your interest rate is infinity AKA it is impossible.  With very few exceptions, players who use loans are going to be better off than those who don't.

[JumboShrimp]

I'm not so sure why you are so obsessed with loans lately, but saying don't use loans is the worst advice ever.

Because I chose strategy described in point #2

You are comparing AWS loans to the real world where there are options and opportunity cost.  Need cash in AWS?  Using a loan costs X percent and is expensive.  Don't want to use a loan?  Then your interest rate is infinity AKA it is impossible.  With very few exceptions, players who use loans are going to be better off than those who don't.

In the points 3-9, I say don't say don't use loans thinking you are paying X% interest, because in reality, you are paying 3X% of what you think you are paying (or 80X if you are prepaying).  You can consider point #1 an executive summary.

Yeah, there is opportunity cost.  It is just good to know what it is.  I don't think anybody knew how out of this world the Bank Fees are in AWS, because if anybody knew, took time to calculate them, I am sure the person would point it out and it would have been fixed, changed to something more in-line with Real World.

[Captain Ted]

I agree with JumboShrimp.  Being debt-free allows me to receive approx. $150,000/month in bank interest.  I've tried the other way in other game worlds and it never worked out. IMO it's better to expand slowly and have a positive cash flow than put yourself behind the cash curve by over extending your airline. 

[Curse]

Loans have their uses sometimes, even if one would have to pay 100% fees. If you need cash to get 2-3 more used aircraft early in the game or to get some more slots or whatever the earning most probably will be way more than whatever loans might cost.

I guess high and unrealistic fees are another way in AWS to take some of the extreme amounts of money we have out of the game and slow down growth at gameworld start at least a bit.

[meiru]

13.59 ? ... if I pay back 1M of loan, it costs 1M + 50k ... (if I take out 1M and pay it back immediately) ... isn't that the case anymore?
of course the calculations in AWS don't help (as almost always)... but calculating the cost of the loan (or guessing what it could be, because of the always changing interest rates) isn't hard... and if you plan to use an aircraft for more than 8 years, it definitely can be the bether solution than leasing an aircraft

[Infinity]

By the way, it's rather off-topic, but if anyone here wants to gain an understanding of how real airline finance works and get a background to compare the game to, I can recommend the book 'Aircraft finance' by Bijan Vasigh. Very comprehensive all-round book on the matter. It's a rather heavy text book and you will need some basic knowledge about general finance to understand it though, so it might not be for anyone.

http://www.amazon.de/Aircraft-Finance-Bijan-Vasigh/dp/1604270713/ref=sr_1_1?ie=UTF8&qid=1403617050&sr=8-1&keywords=aircraft+finance+vasigh

It's rather expensive, but if you have a university in your town their library is likely to have it.

This book is also very good and might be easier to get:

http://www.amazon.de/Airline-Finance-Peter-S-Morrell/dp/1409452786/ref=sr_1_1?ie=UTF8&qid=1403617277&sr=8-1&keywords=airline+finance

[JumboShrimp]

13.59 ? ... if I pay back 1M of loan, it costs 1M + 50k ... (if I take out 1M and pay it back immediately) ... isn't that the case anymore?
of course the calculations in AWS don't help (as almost always)... but calculating the cost of the loan (or guessing what it could be, because of the always changing interest rates) isn't hard... and if you plan to use an aircraft for more than 8 years, it definitely can be the bether solution than leasing an aircraft

If you get a 1M loan, 1 year term, your Bank Fees will be $2,546 per week, $135,913 for the term of the loan, hence 13.59% annual rate.

If you want to repay it fully, you have to pay the $135,913 fully, and on top of that, there is early termination penalty.

If you have that loan for a week, repay it, and take all the fees you have paid, compare them to having borrowed $1M per week, you will see that you have paid annualized rate north of 800%.  That's firmly in the loan shark territory..

[LotusAirways]

Infinity,
Thanks for the link. The first one it's on its way.

Jumbo,
Say I obtain a loan for 500m for one year and pay say 17.5% in interest + bank fees. With the 500m I buy 40 new planes with 26% discount. Isn't this reasonable in your view? I got to (1) buy today with revenues not yet generated, (2) something at a discount price.

LA

[meiru]

If you want to repay it fully, you have to pay the $135,913 fully, and on top of that, there is early termination penalty.

?? ... so, taking out 1M and paying it back one week later costs something around 1.2M ?? ... is that what you're saying?? I never saw such amounts for such a short time... I only payed 5% in the past ... otherwise I don't understand what you try to explain

[JumboShrimp]

?? ... so, taking out 1M and paying it back one week later costs something around 1.2M ?? ... is that what you're saying?? I never saw such amounts for such a short time... I only payed 5% in the past ... otherwise I don't understand what you try to explain

Yes, you would pay somewhere between $135,913 and $200,000 in bank fees if you fully repay 1M loan after 1 week.

[JumboShrimp]

Jumbo,
Say I obtain a loan for 500m for one year and pay say 17.5% in interest + bank fees. With the 500m I buy 40 new planes with 26% discount. Isn't this reasonable in your view? I got to (1) buy today with revenues not yet generated, (2) something at a discount price.

LA

Yes, in that instance,  it is reasonable.  But it is an extreme case.  The money borrowed is highly leveraged, which makes it work.

The credit markets in RL work in "normal" cases just fine, and they should in AWS as well, not only in extreme cases.