Getting a Chattel Mortgage in Australia

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Contents

    What is a chattel mortgage?

    In this fast-paced economy, most successful companies look for strategies to remain efficient and adaptable while keeping their costs lean. A good place to start is by taking a look at your business vehicle expenses. A chattel mortgage is a common business financial tool that can help both self-employed individuals and large companies purchase business vehicles.

    Chattel refers to any piece of movable property, in this case the vehicle. The mortgage is the loan that you are paying back. Under a mortgage structure, the vehicle serves as collateral for your business car loan to give the lender more security. The advantage of this usually comes in the form of lower interest rates.

    To count as a business vehicle and therefore qualify for chattel mortgage car finance, the car must be used for business more than 50% of the time. A major benefit of a chattel mortgage is that the business can take immediate advantage of the tax benefits of car ownership.

    Who are chattel mortgages for?

    Getting a chattel mortgage is possible for both businesses and individuals. For self-employed individuals, an Australian Business Number (ABN) is still needed.

    What are chattel mortgages used for?

    Chattel mortgage car finance can be used for industries relying on transportable equipment, like farming, mining, or construction. It can be even used for boat financing. The most common use for chattel mortgages is to purchase company cars or company trucks. Chattel mortgages are often confused with novated leases, which are another type of business-oriented vehicle finance.

    How does a chattel mortgage work?

    Obtaining a chattel mortgage car loan is fairly similar to getting any other type of vehicle loan. Lenders will provide the funding needed for the purchase of the vehicle and any taxes and fees associated. You or your company will assume possession of the vehicle and become the full owner. The lender will register a mortgage over the asset, enabling them to seize it if you don’t make your payments until completed.

    Chattel mortgages are very flexible and almost any facet can be adjusted, but the base structure is always that you are locked into a secured loan with the vehicle as collateral. Once you finish making payments, the vehicle belongs squarely to you or your business and the lender no longer has any stake.

    Understanding chattel mortgage car finance details

    To clearly grasp the advantages and disadvantages of a chattel mortgage, you have to speak the language of finance providers.

    • Rates

      Chattel mortgage car finance is usually built on fixed interest rates, which remain the same for the entire loan term.A secured loan tends to bring lower rates. The precise rate will also depend on the lender you’re working with, the type and age of the vehicle, and your credit history and earnings.

    • Fees

      Many chattel mortgage car loans come with additional fees, including at the beginning, during, and end of the loan term. You may see extra charges such as processing fees, maintenance fees, prepayment fees, late payment fees, or cancellation fees. Fees often go up with the age of the vehicle.

    • Balloon payments

      With this setup, you pay a large chunk of the overall cost at the very end of the loan, which reduces your monthly payments. Balloon payments can be beneficial because they save money early on while the company is still growing and can’t afford an expensive car deposit.

    Pros and cons of chattel mortgage car finance

    Many companies sensibly want to learn the advantages and disadvantages of a chattel mortgage prior to paying out any money. This table outlines the most important pros and cons for this car finance method.

    Pros

    • Immediate possession of the vehicle, making it an asset for your business
    • Low, flexible interest rates that are designed for companies
    • Tax benefits from claiming interest and depreciation costs as deductions
    • Repayments flexible around seasonal cash flow needs
    • Balloon payments available to delay bulk of vehicle cost until later

    Cons

    • No complete legal ownership of the vehicle until the end of mortgage term
    • Complicated finance structure with little protection from bad lenders
    • Must wait until tax season to claim vehicle on personal income tax return
    • Only a portion of vehicle depreciation, interest, and operating costs can be claimed
    • Responsible for all ongoing costs related to operation and maintenance

    What happens at the end of a chattel mortgage?

    At the end of a chattel mortgage, you or your business can choose what to do with the vehicle. This will be based on whether you had a balloon payment and your current financial circumstances. You can:

    • Trade the vehicle in and purchase another with a new finance agreement.

    • Pay off the balloon payment and retain the vehicle, free and clear.

    • Pay off the balloon payment and sell the vehicle independently of the original lender.

    • Refinance the balloon payment and keep using the vehicle while making payments.

    What are the tax benefits of a chattel mortgage?

    The main advantages of commercially used vehicles consists of the tax benefits, such as:

    • Goods and Services Tax: Businesses registered for the GST can claim the entire GST cost as an imputation taxation credit on their next business activity statement.

    • Interest payments: Interest paid on the chattel mortgage can be claimed as a deduction on annual income tax.

    • Depreciation value: Since the vehicle loses value over time as it gets used, you may be able to claim this depreciation as an additional deduction, but there are limits on these claims as laid out by the ATO.

    Note that these tax deductions can only be claimed proportionally to how much the vehicle is used for business. If the time is split between 75% business use and 25% personal use, you would have to account for that accordingly. Be careful to only include any usage that is clearly permitted by the ATO.

    Chattel mortgage car loan FAQ

    Can I get a chattel mortgage if I have bad credit?
    Yes, a bad credit chattel mortgage is possible, but you or your company must still demonstrate ability to repay the loan.
    I run a seasonal business, can I apply for a chattel mortgage?
    Yes; chattel mortgages are uniquely flexible because they are business-oriented and recognize that most companies don’t have flat sales across the entire year.
    Can I get a second-hand car with a chattel mortgage?
    Yes, chattel mortgage car finance is available for used vehicles, but the maximum age or mileage is subject to the discretion of the lender. Older cars are seen as more risky and they will have lower resale value.

    Chattel mortgage car finance conclusion

    Many businesses have a hard time affording large expenses that are necessary to get the company up and running so that they can start making money. A chattel mortgage is a popular, accessible, and flexible way for you or your company to access funding for a business vehicle. Understanding exactly what is a chattel mortgage and how it works can prove highly beneficial to the success of your business.