Lessons in Car Finance: Key Benefits of Taking Out a Chattel Mortgage Over a Car Loan

For business owners or managers that need to purchase vehicles to operate their business, paying for the asset upfront can have a huge impact on their financial resources. With second hand vehicle prices starting from $3000 and brand new vehicles starting from $14,000, the cost to purchase the vehicle (or several outright) might require the business to part with tens or hundreds of thousands of dollars in funds. For many small to medium sized businesses, this cost is too much for people to manage.

Business cars

When it comes to car finance, personal or car loans are another option, however the repayment costs tend to be high. The optimal solution for businesses is to proceed with a chattel mortgage.

How do chattel mortgages work?

Chattel mortgages work similar to property mortgages. The lender would secure the loan against the asset. In this case, the asset is the vehicle being purchased. The ownership rights would remain with the purchaser of the vehicle while the mortgage would remain on the vehicle until the final payment.

How long would you need to commit to a chattel mortgage?

Chattel mortgage repayments can be tailored to your business’s needs. Terms typically range from 12 to 60 months, however longer terms can be negotiated with your lender. Alternatively, a final residual payment (also known as a balloon payment) can be negotiated to settle the loan at a nominated time that is agreed between your business and the lender.

How can chattel mortgages benefit your business?

Unlike personal or car loans, the expenses associated with chattel mortgages can be offset against your business. Because a chattel mortgage is a business transaction, your business will be able to claim:

Vehicle depreciation

As long as the vehicle is used for business purposes more than 50% of the time and the leased amount is less than the depreciation limit set by the Australian Taxation Office in 2014-2015 ($57,466), the lease rental can be claimed as a tax deduction.

Interest costs

Interest rate fees for car and personal loans from some of Australia’s largest financial institutions will start from 13% per annum. Purchasing a chattel mortgage with lenders like Positive Lending Solutions will enable you to receive interest rates from 4.24%.

GST (Goods and Services Tax)

Your business can claim GST in the first BAS statement after purchasing the vehicle. No GST payments need to be made on periodical payments or the final balloon payment since the financier claims the GST on the vehicle’s purchase.

Tax credits

The Australian Taxation Office allows businesses to claim tax credits when they enter into a hire purchase agreement.

Reference: https://www.ato.gov.au/Business/GST/In-detail/GST-issues-registers/Financial-services—questions-and-answers/?anchor=a1_5#a1_5

How does the application process work?

Businesses can apply for finance that is up to 100% of the value of the vehicle, make a partial deposit or trade in your current vehicle and use the chattel mortgage to balance the purchase price. You can use the chattel mortgage calculator to get a quick quote and feedback on your eligibility to apply.

Cash flow benefits for businesses

When it comes to managing finances within a business, positive cash flow is king. Paying off the secured asset in payment increments reduces the business’s funds being tied up in assets and allows the business to perform with a better operating profit.

Caveat – Chattel loans are not regulated

Unlike traditional loans or mortgages, chattel mortgages aren’t regulated under the National Credit Consumer Protection Act. (NCCPA).  This means both the lender and the buyer are at risk since the credit checks that licensed credit providers undertake aren’t applicable. Make sure you choose a chattel mortgage provider that is reputable, fair and transparent with the terms and agreements of the loan.

Chattel mortgage solutions boast a number of benefits for business owners and managers. When compared to purchasing a car loan, the business owner will have lower overhead costs and reap financial benefits from tax and business operating expenses. If you are in the market to purchase a vehicle and you operate a business, enquire about chattel mortgages today!

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