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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.
A chattel mortgage is like a secured car loan designed specifically for vehicles that are at least 51% 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.
In a sole trader context, your personal credit history is a primary factor in the approval process. Because there is no legal separation between you and your business, lenders will scrutinise your personal credit score to gauge reliability. A high score can lead to faster approvals and lower rates, while those with credit challenges may be required to provide a larger deposit or settle for shorter loan terms.
It can vary, depending on the terms of the individual contract, but generally:
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.
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 to 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, chattel mortgages are 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.
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 offered 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 example below to see some of these implications.
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:
Because the vehicle is entirely for business use, he can claim depreciation on it, and he can claim the interest as a deduction - including the 40% he pays up front, which is separate to the purchase price. What he can't do is also deduct the full purchase price: an immediate deduction for the whole cost is only available through the instant asset write-off, capped at $20,000 per asset first used or installed ready for use from 1 July 2023, and only for businesses turning over under $10 million that use the simplified depreciation rules. A separate car limit also caps what can be depreciated on a passenger vehicle.
After a year, his old car breaks down and he trades it in. Now he's only using the new ute for 51% business use and 49% personal use. Luckily for him, he was able to claim the up-front interest 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:
Choosing between full-doc and low-doc finance depends on the availability of your financial records. Low-doc options are popular for sole traders who may not have up-to-date tax returns but can prove income through alternative means. Below is a checklist of what you might need:
Low-doc checklist (typically for loans up to $250,000):
Full-doc checklist:
Understanding how a chattel mortgage compares to other structures is vital for selecting the right finance. While a chattel mortgage grants immediate ownership, other options offer different cash flow and tax profiles:
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.
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