Australian business owners can use a chattel mortgage to finance vehicles and equipment to accelerate the growth of their operations while preserving capital and optimising tax outcomes.
This type of business loan provides immediate ownership of the asset while allowing structured repayments, making it an attractive option for sole traders, partnerships, and companies alike.
But as with any finance product, a chattel mortgage comes with its own blend of benefits and drawbacks.
In this article, we will discuss the pros and cons of this type of business loan so you can determine if it is right for your circumstances.
Chattel Mortgage Basics
A chattel mortgage is used to finance the acquisition of commercial assets that are then held as security over the loan until it is repaid.
It works just like a secured car loan that a regular consumer would be familiar with. To learn more about the basics of a chattel mortgage, click here.
Advantages of a Chattel Mortgage
Fast Approvals with Low Requirements Available
You can access a chattel mortgage through your business without the need to provide comprehensive financials if you meet certain criteria.
A low-doc loan may only require:
- Identification documents
- ABN registration (>6 months old)
- Details of the asset being purchased
Approvals are also typically processed in minutes rather than days!
For more complex deals and full doc applications, things are going to take longer.
But if you want the quick & easy route, then the pathway exists, allowing you to get back to business faster! Click below to get in touch with our brokers and get started!
Tax Benefits
There are several tax advantages available to the business owner when taking our a chattel mortgage car loan.
This can include the following, but we always encourage you to speak to an accountant for specific advice:
- Loan interest payments can be claimed as a deduction.
- Depreciation of the asset can also be claimed as an expense.
- GST credits may apply in some circumstances.
Government incentives and instant write-offs should also be part of this conversation.
The ATO rules on this change regularly, and this should form part of a conversation with a tax professional.
Lower Interest Rates vs Alternatives
A secured loan is less risky for a lender when compared to a general unsecured business loan. Which could attract an interest rate upwards of 50% in some circumstances!
A chattel mortgage is much less risk for the lender because they can repossess the asset to recover funds in the event of default, plus they also know what the funds are being used for.
The end result is an interest rate that is much more affordable for your business.
Access to Fixed Interest Rates
Predictable expenses are also a win for your business, so you can plan your cash flows into the future.
A chattel mortgage is usually setup on a fixed interest rate, so you have that certainty for the life of the loan.
If you would like to estimate your repayments on a chattel mortgage then check out the free calculator below.
Ownership of the Asset
Unlike leasing or a hire purchase arrangement, a chattel mortgage gives you legal ownership of the asset from the moment of purchase.
The lender will register a security interest in the vehicle so that they are protected if you default on the loan.
While you will need to inform the lender if you plan on selling the vehicle, you are generally not subject to any restrictions on what you do with the asset.
Flexible Repayment Terms
A chattel mortgage can be customised to suit your cash flow needs.
If low repayments are your priority then extended loan terms or balloon payments can be included in the loan structure.
Aggressive payment options are also possible if the priority is to pay off the debt as quickly as possible.
Disadvantages of a Chattel Mortgage
Responsible for Maintenance
Given that you own the asset, it means that you are solely responsible for the maintenance on the vehicle.
Servicing and repairs will all come out of your pocket, compared to a lease agreement, where your payments may include a pre-determined maintenance schedule.
Asset Depreciation
Vehicles are known for losing value rapidly, especially in the early years. So expect any future resale value to be a fraction of your outlay.
If you do choose to structure the mortgage with a balloon payment then you will need to be weary of a negative equity situation in the future.
This happens while the value of the asset is lower than the balance on the loan. In the first year of your loan term this is always the case unless you pay a large deposit.
Where it can cause problems is if you have to sell the vehicle early in the loan term, or if the depreciated value is lower than you expected.
You may find yourself with a shortfall to cover out of your own pocket to pay the loan off.
Meeting a Balloon Payment Obligation
Balloon payments have a habit of sneaking up on you!
That final payment could be upwards of five figures so unless you have this sitting in your business bank account, you may need to refinance your loan.
However, this is often the point where business owners choose to just upgrade their vehicle rather than just extending the repayment term.
Upfront Costs and Fees
A chattel mortgage will attract a number of upfront fees when setting up the loan.
Application fees, establishment costs, registration charges, and broker fees are all common.
It is important ot understand all of these fees prior to committing to your new loan.
Restrictions on Asset Use
Any vehicle financed through a chattel mortgage must be used mostly for business purposes.
If you do not meet this threshold, then you may be ineligible to claim the tax benefits mentioned earlier in the article.
If you plan to use the vehicle for personal use then it will be worthwhile keeping records so you have evidence and can preserve the tax benefits of a chattel mortgage.
Harder to Upgrade Your Vehicle
If you are planning to upgrade your vehicle regularly then a chattel mortgage will be less suitable compared to a lease.
You will have to sell or trade in the asset, and reapply for a new loan every time you want to upgrade.
This can be a bit more legwork each time and is burdensome if it comes up regularly.
Conclusion
A chattel mortgage can be a powerful tool for business owners looking to accelerate business growth while accessing tax benefits with full control over their assets.
GST-registered businesses are especially well-positioned when taking out this type of commercial finance.
Get in touch with our brokers below to get started with your chattel mortgage application today.
