The short version
- A chattel mortgage lets your business own a vehicle or equipment from day one, with the lender holding security over it.
- You may be able to claim the GST, interest and depreciation.
- A balloon lowers repayments but leaves a lump sum at the end.
What is a chattel mortgage?
A chattel mortgage is a secured business loan for a moveable asset, or chattel, such as a car, ute, truck, work equipment or machinery. It's sometimes called an equipment loan. You own the asset from the day you buy it, and the lender holds it as security, much as a bank holds a home as security for a home loan. You repay on a set schedule, and when the loan is repaid the lender releases its security.
Because the asset secures the loan, rates are usually lower than on an unsecured loan or a consumer car loan.
Who it's for
Companies and self-employed people buying a vehicle or equipment used for business more than half the time. For example, a tradie buying a ute to carry tools could use one. You'll need an ABN, and being registered for GST lets you get the most from the tax treatment. Steady income and a clean credit history help with approval.
When it makes sense
Lower rates than unsecured loans are one reason businesses use chattel mortgages. The other is flexible repayments: terms usually run from one to five or seven years, at a fixed or variable rate, and you can choose equal repayments or smaller ones followed by a balloon payment at the end, which can suit your cash flow.
Features
- Used for business more than half the time.
- Secured against the asset you're buying.
- You own the asset from the start.
- Many lenders finance the full price, and some let you add on road costs such as registration and insurance.
- Terms usually from 1 to 5 or 7 years, at a fixed or variable rate, with an optional balloon payment.
- Interest and depreciation on the business-use share may be tax deductible, and GST on the price can often be claimed on your next BAS. Check with your accountant.
Pros
- Lower rates than unsecured business finance, as a rule.
- Repayments can be shaped around your cash flow.
- You own the asset as soon as you buy it.
- GST on the purchase can often be claimed upfront.
Cons
- As business finance, a chattel mortgage isn't covered by the National Consumer Credit Protection Act. That can make approval easier, but a lender may approve more than you can comfortably repay.
- A balloon payment leaves a large sum due at the end, and you pay more interest overall.
- Establishment and monthly fees may apply.
- If the business can't keep up repayments, the lender can repossess the asset.
Chattel mortgage, hire purchase or lease
- Chattel mortgage: you own the asset and the lender holds security over it until the loan is repaid.
- Hire purchase: the lender owns the asset and you pay to use it. Ownership passes to you at the end, sometimes only after a final balloon or residual payment.
- Operating lease: like renting. You pay to use the asset for a set time, then hand it back, lease it again or buy it at an agreed price.
- Car loan: a personal loan for a car, not business finance, so the car doesn't need to be used for work, and consumer credit protections apply.
Choosing how to finance a business vehicle
Look past the interest rate to the total cost, the tax treatment and how long you'll keep the asset. If you only need a vehicle for a few years, a lease may cost less than buying. If you're not sure you'll want it long term, hire purchase with an option to buy can keep your choices open. Get independent financial and tax advice before you sign.
Alternatives
- Hire purchase, where the lender owns the item until the last payment.
- An operating lease, where you rent the item and hand it back.
- An unsecured business loan, for items a lender won't take as security.
How to apply
Lenders want to see that the business can repay a chattel mortgage from its cash flow.
- Have your numbers ready. Usually two years of business tax returns and financial statements, recent BAS and business bank statements.
- Know your ABN details. Most lenders want the business to have traded for at least six to twelve months.
- Expect a director's guarantee. Many lenders ask the owners to guarantee the loan personally, even when it's secured.
- Ask about the total cost. Business loans aren't covered by the same credit laws as personal loans, so check every fee and the repayment schedule in writing.
What to compare
Business loans don't have to show a comparison rate, so add up the costs yourself: the interest rate, any establishment and ongoing fees, and what it costs to repay early.
Business lending isn't covered by the responsible lending rules that apply to personal loans and home loans, so a lender won't necessarily check the loan suits you. Work out what you can afford before you apply.