Chattel Mortgage for a Car Loan: What is it and how does it work?
A chattel mortgage is a type of financing that allows you to use your car or equipment as collateral in exchange for financing. Just like any other type of loan, chattel mortgages come with their own set of pros and cons. Learn more about this type of financing, what it means for your purchase, and how you can benefit from one today!
What is a chattel mortgage?
A Chattel Mortgage is an old-fashioned term referring to a method of financing your purchase of an asset like business equipment or vehicles. The term ‘chattel’ refers to the asset, while ‘mortgage’ refers to the loan.
Essentially, your lender considers the asset you purchase as security for your loan. Your business makes regular repayments over the loan term, until the loan is paid back. As your asset is security for the loan, if you don’t pay back the money owed on time, the lender can repossess and sell off your asset.
An important consideration is that a chattel mortgage can’t be used for just any purchase. The vehicle or equipment you are borrowing money for, must be used predominantly for business purposes.
How does a chattel mortgage work?
Similar to a secured car loan, with a chattel mortgage the lender will provide funds to purchase the asset. You take ownership of the asset at the time of purchase and the lender uses the asset as security. Once the chattel mortgage is paid out in full with weekly or monthly repayments, you then own the asset outright and can do whatever you would like with it.
Benefits of a chattel mortgage
There are many benefits to using a chattel mortgage:
- You can usually expect lower interest rates than most consumer car loans
- Lenders usually provide flexible repayment options when it comes to the length of the loan, referred to as the loan term
- If you’re registered for GST, you can claim the GST paid on the total purchase price of the car as an input tax credit in your Business Activity Statement (BAS).
- There are other tax benefits such as claiming interest paid and depreciation as a tax deduction, as your vehicle is a business asset
The downsides of a chattel mortgage
The downside to a chattel mortgage is that your car is security for the loan. This means that if you don’t make payments on time, or at all, your lender can repossess your vehicle and sell it to satisfy the outstanding balance of your car loan.
Chattel mortgage vs secured car loan
There are some important considerations if you’re comparing a chattel mortgage and a consumer car loan:
- A chattel mortgage is for business, and the asset or vehicle must be used at least 50% of the time for business purposes
- Consumer loans typically offer less flexible terms
- Consumer loans usually have account-keeping fees and other charges
Chattel mortgage and balloon payments
A chattel mortgage with a balloon payment is another option for a secured business car loan. The balloon payment refers to a lump sum payment that is due at the end of the loan term.
Some business owners may opt for this type of loan as it can shorten the loan term and allows lower repayments during the loan term which allows for better cash flow. The drawback is that you’ll need to save up to pay the balloon amount at the end of the loan – or refinance the amount of the balloon to a new loan (and then pay that off over time). This can end up being a costly option.
Read our article: Balloon payment for car loans
A chattel mortgage can help you finance your purchase of business equipment or vehicles.
A chattel mortgage can only be used when purchasing a car for business purposes (which means at least 50% of the time). A common misconception is that you can use this type of financing to purchase anything and everything, but this isn’t true; there are specific requirements to be met.
If you’re researching finance options and looking for a way to finance your purchase of equipment or vehicles, a chattel mortgage may be the right option for you. It allows you to use your car as collateral and get an affordable car loan with competitive rates.
