A chattel mortgage is most suitable for buying long-term business assets, like a car, or other types of commercial vehicles.
While this type of loan is almost identical to a regular car loan in its function, it also avails a number of tax advantages that are unique to business owners.
In this article, we will look at why a business owner would finance a vehicle with a chattel mortgage and discuss the advantages to this compared to alternative finance options.
What is a Chattel Mortgage?
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.
They can be utlised to finance all kinds of assets, including a car, ute, truck, or other equipment required to run the business.
Repayments are made on the loan in the same way as a regular car loan or mortgage until the balance is repaid in full.
The lender will register a security interest in the goods financed so that in the event of non-payment, they could repossess the goods.
Ownership of the Asset
Under a chattel mortgage, the borrower will take ownership of the asset from day one. While the lender has a security interest it does not affect the ownership of the acquired vehicle.
There are a number of tax advantages related to the ownership status, which can include:
- 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.
Be sure to speak to a tax professional for advice relevant to your circumstances.
How to Qualify for a Chattel Mortgage Car Loan
You must have an ABN to be eligible for a chattel mortgage that was registered at least six months ago.
The asset being purchased must also be used predominantly for business purposes.
Small business owners, sole traders, and larger businesses can all apply and will have to meet a number of thresholds that will vary depending on the type of loan they are seeking.
Given the complexity of commercial finance, there are any number of variables. But for simplicity, we’ll split the requirements into two categories below.
It is also worth noting that not all lenders will offer all categories of a chattel mortgage. It is also important to know where your application has the best chance of success.
For an obligation free assessment you can get in touch with our brokers below. We can get you into your new car in no time!
Low-Doc Loan
There is a much lower threshold for low-doc loans and you may be able to get an approval with as little as:
- Identification documents
- ABN registration (>6 months old)
- Details of the asset being purchased
In some cases, you may be required to provide additional information which could include, but is not limited to:
- Proof of property ownership (E.g. a rates notice)
- Recent Business Activity Statements (BAS)
Anything beyond this and we are getting into full-doc territory.
Full-Doc Loan
Your application for a full-doc chattel mortgage will be far more comprehensive, but may also improve the conditions of the loan available to you.
The more information a lender has about your business the better they can assess the risk of the loan. This will work in your favour if you present as a good, reliable business.
You may be eligible for a lower interest rate, a longer repayment term, and a flexible structure that could include a balloon payment to help minimise the size of your repayments.
The documentation required will be much more comprehensive and could include the following:
- ABN registration
- GST registration
- Accountant letter
- Business Activity Statements
- Up to 6 months of business financials
- Tax returns (up to two years)
- Evidence of cash to be used for a deposit
- Details of property owned
The list of requirements is dependent on your situation and potentially only some of these are needed.
A broker can help you navigate this process and ensure your application is complete and well presented to the lender.
Submit an enquiry below, and our team will be in touch.
Pros and Cons of a Chattel Mortgage
Here is a basic summary of the pros and cons of a chattel mortgage. Check out this post for a deep dive into all of the advantages and disadvantages.
Advantages
- Access to a quick and easy path to loan approval via a low-doc loan.
- Lower interest rates compared to an unsecured business loan or car loan.
- Interest rates are usually fixed so that the ongoing expense is known when entering the agreement.
- The asset is owned by the business on day one.
- Depreciation, interest, and GST credits could be claimed and reduce tax liabilities.
- Option minimise repayments through favourable structures like extended loan terms and balloon payments.
Disadvantages
- The ownership of the asset requires the business to be responsible for the ongoing maintenance to ensure the useful life is as long as possible.
- While depreciation can be included as a cost to the business for tax purposed the actual resale value of the asset will diminish over time.
- It may be complicated to sell or upgrade the asset while the security interest of the lender is in place.
- If a balloon payment is part of the agreement, then a significant amount of cash will be required at the end of the loan term. However, it may also be possible to refinance this portion of the loan.
To take full advantage of the benefits of a chattel mortgage the borrower should stick to financing medium to long-term assets.
Alternatives to a Chattel Mortgage for Business Owners
Hire purchase
A hire purchase agreement can be great for assets that are low maintenance and that you will own long term.
At the end of the hire period, the ownership will transfer to you.
As a result, some of the tax advantages of a chattel mortgage may not apply. But always seek professional advice.
Finance Lease
Leases can be useful when financing assets that:
- Have a shorter life cycle and may need upgrading regularly.
- Depreciate at a rapid rate and would be a burden to carry on your balance sheet.
- Would not attract a GST credit if owned.
The main advantage of a lease agreement is the flexibility built in and the lack of long-term obligations beyond the term of the lease.
Business Loan
While you could finance a vehicle with a general business loan, it is likely to be the most expensive option.
If the loan is unsecured, the interest rates can reach eye-watering levels!
You may be able to secure the loan against the business so that you retain flexibility in the use of funds, rather than it being tied to a specific asset.
However, for the purpose of buying a car or other type of business vehicle a chattel mortgage will usually be the easiest and cheapest option.
Conclusion
Once a chattel mortgage is in place, it operates the same way as any other secured loan and will be just as familiar as your home loan.
The differences are in the tax advantages – which your accountant should manage – and the commercial loan application.
If you need assistance understanding the requirements for both a low-doc and full-doc chattel mortgage and which is most suitable for your situation get in touch with our brokers below and we’ll be in touch today.
