Chattel Mortgages for Business Vehicles: Is It the Right Choice for You?
Posted on 13th April 2023
A lot of companies turn to leasing or buying to acquire their business vehicles. These business strategies do work under the right conditions—but certainly not all of them.
If you want to possess a car title under your firm’s name but don’t have the finances to acquire it just yet, you can consider applying for a chattel mortgage.
This type of loan is a fantastic way to get you jumpstarting your business operations earlier than intended without having to risk potential long-term debt. It’s also ideal for companies that intend to own their vehicles in the long-term future.
Depending on your specific situation, considering a chattel mortgage can be the right business strategy for you. With that said, let’s take a look at what chattel mortgages are and some of the advantages of getting this form of financing.
What is A Chattel Mortgage?
A chattel mortgage refers to a type of loan in which a movable asset class (or “chattel“) such as a car is used as collateral. It’s an arrangement between a lender (typically a bank or credit union) and a borrower, where the loan would be used to purchase the asset.
How Does a Chattel Mortgage Work?
When a borrower applies for a chattel mortgage to purchase a movable asset, the lender provides a loan for the said asset. The borrower can use the vehicle for profitable operations, but legally, it’s under the ownership of the lender until the mortgage is fully paid out.
In a chattel mortgage scheme, the lender has a security interest in the vehicle. This means that if a borrower defaults on the loan, the lender can legally repossess the asset to recover the outstanding debt.
But if the payments are timely, the borrower can use the vehicle in any capacity as long as it’s within the bounds of the contract. The only difference between a chattel mortgage setup and full ownership is that lender has a legal claim over the vehicle until the loan is fully repaid.
Once the loan is fully repaid in monthly repayments, the security interest is removed, and the borrower owns the vehicle outright. The ownership will be transferred to the borrower, and the vehicle can no longer be legally claimed by the lender.
4 Benefits of a Chattel Mortgage Setup
A chattel mortgage can be advantageous for businesses and self-employed individuals in several ways. This includes:
Flexible payment structure
Want to hold ownership of a vehicle (or an entire fleet) without taking the risk of putting down an enormous down payment? A chattel mortgage allows you to pay smaller amounts over a period, making it easier to budget your costs effectively. You also have more flexibility over the term, typically ranging from 2 to 5 years.
Not only do chattel mortgages allow you to do a repayment scheme, but you can also get into an agreement with the lender to lower the monthly repayments. You can do this by agreeing to do a lump sum balloon payment at the end of the contract. That said, be cautious as this can increase the interest rate of your mortgage.
You can claim benefits
In the case that you’re applying for a chattel mortgage for a business vehicle or equipment, you’ll be pleased to know that you’re eligible for some excellent benefits.
In Australia, the borrower can claim a credit from the goods and services tax (GST) you used to initially pay for the vehicle. Furthermore, any interest charged on the loan can also be claimed as a tax deduction. Depreciation costs can also be claimed if you’ve been using the chattel for solely business purposes.
Take note, this type of mortgage plan isn’t secured by the National Consumer Credit Protection Act (NCCP Act) in Australia. Be sure to talk with a financial expert or click here for more information regarding chattel mortgages to ensure you’re following all the best legal practices.
Lower interest rates
Chattel mortgage schemes typically have lower interest rates than unsecured loans.
Since the chattel is already under their name, there’s a smaller incentive for lenders to jack up the interest rate compared to traditional lending services where the guarantee and documents associated with it would still need to go through rounds of hand-switching.
Easy to secure
Compared to a traditional immovable mortgage plan, applying for a chattel mortgage is quite a bit easier. This is because lenders are typically more open to providing loans for movable assets since they are often more liquid than assets like real estate.
This makes them an excellent option for businesses or individuals who don’t have a strong financial identity or credit score at this time.
5 Signs Your Business Would Benefit From Chattel Mortgages
Acquainted with the benefits of a chattel mortgage by now? Great!
Let’s take a look at five telltale signs that investing in one is the best strategy for your business.
Your business needs to preserve its cash flow for further investments or to reduce costs
You work in industries like IT or manufacturing, where your equipment and technology stack is constantly evolving
Your business is still in its budding stages but has shown good signs of growth
You have a comprehensive idea of your company’s direction, and your profitability is looking up.
