Chattel Mortgages Explained

  • Posted 30 Dec
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Chattel Mortgages Explained

With the wide range of car financing options available, people are often scratching their heads as to what to choose. How do you decide on a loan if the small print is so difficult to understand as well? It can be an exasperating experience.  Chattel mortgages in particular tend to leave customers perplexed. After all, the term ‘mortgage’ is usually associated with owning land or property. In this guide we cut through the complicated jargon and give you a clear overview of how this type of loan works and why it may be worth considering.

The Basics

Chattel mortgages, also known as ‘goods mortgages’, are usually reserved for the purchase of motor vehicles for business use only. The lender will provide funds for you to purchase the vehicle, after which you become the legal owner straight away. However, the car will need to be used for business purposes at least half the time (≥ 50%) to fulfil the usual terms on such an agreement. What follows is where the ‘mortgage’ element comes in. The lender takes out a mortgage on the vehicle you’ve purchased. This secures their investment, should you default on the monthly loan payments. Otherwise, the loan works in similar fashion to the average repayment loan structure you may already be used to. Payments are made on a monthly basis according to an agreed schedule, with a pre-calculated interest rate over a term from 1-5 years. Once you pay off the amount stipulated in the mortgage agreement, you have no further commitments to the lender. The fixed charge that was placed over the asset (as registered on the ASIC report) is removed and you are free to resell your vehicle as and when you please. Important: While the chattel mortgage is being paid off, you are unable to sell your vehicle unless you pay the full amount owing.

Benefits of Chattel Mortgages

Chattel mortgages give customers a variety of benefits. These are outlined below:

  1. The interest charged on the loan is tax deductible, just like the depreciation of the vehicle. They can both be claimed against business income at tax time.
  2. Chattel mortgages repayments can also be structured based on the needs of your business, which means that they’re ideal for a transparent and simple financing plan. You can plan well ahead and pencil in exact payments, rather than having to worry about market fluctuations.
  3. It’s possible to add a balloon payment option to your loan, making the monthly repayment a little more affordable. You will often have the option for arranging several balloon payments through the repayment cycle.
  4. You can opt to make a deposit payment upfront that will further reduce the size of the loan. This initial amount can be negotiated with the lender based on your financial situation.
  5. Considering chattel mortgages are secured loans (against the vehicle), the rate of interest is far lower compared to your average bank loan. The reason for the lower interest is due to the fact that the lender can take ownership of the vehicle should you default on payments. This setup makes this loan type particularly affordable.
  6. Are you registered for GST? Then you can claim against the GST portion of the price of the vehicle, further lowering the overall costs.

Overall, chattel mortgages can be significantly cheaper than any other loan type (depending on your situation). This makes it well suited to a range of customers, whether you are a sole trader, company, trust, partnership or anyone who holds an ABN (Australian Business Number). If you are looking at ways to reduce your business costs and need a vehicle, contact Australian Credit and Finance to discuss the option of taking out a chattel mortgage today.

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