When it comes to car and equipment finance, a chattel mortgage is a popular option among business owners and operators. Some finance providers, including CommBank, might call it a car or equipment loan.
A chattel mortgage has a similar structure to a fixed-rate traditional home loan or mortgage.
A finance provider uses the car or equipment you get as the security for your loan. Chattel refers to the car or equipment, and mortgage refers to the loan.
Unlike a Hire Purchase or a Finance Lease, an Equipment Loan gives you ownership right away and you then pay off the loan from the income the asset generates in your business.
If you’re unable to meet your repayments, your finance provider may be able to repossess your car or equipment.
What are the benefits of a chattel mortgage?
- Repayments can be structured over a range of terms – usually 2 to 5 years
- Interest rates are usually lower than unsecured loans and can be fixed or variable
- Repayments can be fixed at the same amount each month or can be structured to fit your seasonal cash flow requirements (fixed rate)
- You own the financed asset up-front, so it appears as an asset on your balance sheet as well as the finance showing as a liability
- A balloon or residual payment can be set at the end of the term to lower your monthly payments
What’s a balloon payment?
A balloon payment or residual amount is an amount that's not paid off until the end of your agreement. The higher the balloon payment, the lower your monthly repayments.
Keep in mind that higher balloon payments will increase the amount of interest you pay over the loan period, as you won’t be paying down the principal as quickly.
You might choose to have a balloon payment if you prefer to keep repayments lower for cash-flow purposes.
It’s important to make sure any balloon payment you agree to is likely to be manageable at the end in case you want to simply sell the asset and pay off the finance.
Tax implications
With a chattel mortgage, the goods and services tax (GST) inclusive purchase price of the car or equipment is financed and you’re entitled to claim an input tax credit up-front.
You may also be able to claim interest and depreciation costs, depending on how much you use your car or equipment for business use.
It’s a good idea to seek advice from your accountant regarding your circumstances and tax impacts.
Any other considerations?
As with all financing agreements, it’s important to measure up how long you expect to use the equipment or vehicle in your business, its effective life, and your cash-flow expectations.
The best possible finance package comes down to negotiating both the cost of the vehicle or equipment and the finance charges. Saving money on financing business equipment can often come down to the amount you are financing and total repayments, not necessarily the cheapest interest rate. Make sure you consider both of these as separate items when comparing your options.
It’s also important to find out if there are any additional fees and charges or any monthly fees for setting up the finance and managing it during the term.
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