A chattel mortgage is a bit like a hybrid car loan, but made especially for business vehicles. The business takes ownership of the vehicle at the time of purchase, while the lender retains an interest in it. From there, your business makes repayments and once it’s paid off you receive full ownership of the vehicle. This guide explains why it’s useful, and the pros and cons of a chattel mortgage compared to a car loan.
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A chattel mortgage is like a secured car loan designed specifically for vehicles that are at least 50% business-use. The main benefit is that it’s a bit more flexible than typical consumer car loans, which may let you access some more favourable rates and other useful terms. The downside is that it’s not as strictly regulated, and is a lot more “buyer beware” than consumer loans.
How does a chattel mortgage work?
It can vary, depending on the terms of the individual contract, but generally:
The lender gives you money to buy a vehicle.
You take ownership of the vehicle immediately while the lender retains a registered interest in it.
Once you finish paying off your chattel mortgage, the lender no longer has an interest in the vehicle.
Typically, you can adjust almost any terms and conditions of a chattel mortgage, with a few exceptions. The main one is that it will always be a secured loan, with the vehicle itself as collateral.
What are the benefits of a chattel mortgage?
The main advantage of chattel mortgages is that they aren’t as strictly regulated as other car loans. Someone with poor credit might use it to buy essential business equipment more easily, while someone else might specifically tailor the loan terms for more tax benefits, or other things that are not available with standard loans.
For example, someone might negotiate a chattel mortgage to include a large initial deposit, so that more can be written off as a tax deduction that year. Meanwhile, someone else might simply use a chattel mortgage to get a lower interest rate than mainstream lenders are offering.
Or, people who need an essential business vehicle, and expect it to increase their income, might want try for a chattel mortgage that allows early repayments.
Generally, a chattel mortgage can offer a lot of benefits for someone who knows what they want, and knows what they’re doing. However, it is not as heavily regulated as standard car loans, so you need to be absolutely certain you understand all the terms and conditions before signing up.
Tax benefits of a chattel mortgage
None of the following information should be construed as tax advice, or even a suggestion. It’s simply to give you an idea of the potential opportunities offers by chattel mortgages. Everyone’s situation is different and the following information might not be applicable to your needs. You may want to consult a tax adviser or accountant before taking any action.
One of the main features of chattel mortgages, compared to something like a lease agreement, is that you become the owner of the car right away.
With a lease, you are simply paying to use the vehicle, however with a chattel mortgage you are “buying the car yourself” but just happen to be using someone else’s money, which you obtained under a separate contract. This has tax implications. Take a look at the case study below to see an illustrative example of these implications.
Jim the landscaper
Jim is a sole trader looking for a new ute to use entirely for his landscaping business, while he keeps driving his other old car for personal use. He looks into chattel mortgages and finds one that lets him:
Pay 40% of the total interest repayments cost up front
Pay the remaining 60% in equal monthly instalments over the next three years
Because the vehicle is entirely for business use, he claims the full cost of the purchase as a tax deduction. Because the 40% up front interest repayment is something separate to the purchase price, he also claims that amount back as a tax deduction. Because he owns the vehicle, he can also start claiming depreciation as a write-off.
After a year, his old car breaks down and he trades it in. Now he’s only using the new ute for 50% business use and 50% personal use. Luckily for him, he was able to claim a lot upfront as a deduction, back when the vehicle was 100% business use.
Chattel mortgages can help you find flexible terms that are potentially more beneficial than the terms of a standard car loan. You might:
Utilise deposits and balloon payments. These big payments can give you more control over your tax write-offs.
You take ownership of the vehicle. Not all types of car finance will necessarily let you claim depreciation on the cost of a business vehicle. Chattel mortgages might help.
Write off interest payments. You might choose a longer or shorter term to help find the optimal repayment structure for your business needs.
GST benefits. A chattel mortgage might give you more options for balancing the GST write-offs on your business activity statements (BAS) and your other tax deductions.
Other types of business car loans
Some of the other types of business car loans include:
Commercial hire purchase. With this type of loan, a company leases or hires a car for a certain time frame, and pays a fixed monthly payment towards the car’s use.
Finance lease. This type of car loan lets a business use a car as a commercial vehicle and enjoy car ownership, while in fact the lending company owns the car.
Novated lease.This type isn’t technically a form of business car loan, but more a salary sacrificing method for employees. This is best for tax shelter purposes for both the employer and the employees.
A chattel mortgage is a type of loan for buying a vehicle for the purpose of using it mainly for business operations. The set-up lets you own the vehicle while the lender takes over the vehicle as security.
The flexible terms and potentially competitive rates mean it can be a suitable option for a lot of businesses, but it’s always important to make sure you fully understand the terms and conditions of any loan.
Matt Corke is Finder's head of publishing for rest of world and New Zealand. He previously worked as the publisher for credit cards, home loans, personal loans and credit scores. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time, he has survived the dot-com crash and countless Google algorithm updates.
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