The advantages and disadvantages of a chattel mortgage

When you successfully apply for a chattel mortgage, a lender will provide you with the money needed to purchase a vehicle, also known as the “chattel” - a piece of movable property. This chattel will also be used to secure the loan. This means you retain the ownership of the vehicle, but you may lose the vehicle if you default on repayments.

A chattel mortgage doesn’t just have to be for buying a car – some businesses use chattel mortgages to finance the purchase of specialised equipment, machinery and more.

To apply for a chattel mortgage, you’ll typically need to provide details of your business, including its financials. Different lenders may have different eligibility criteria, such as how long you’ll need to have been in business for.

Once you make all the repayments, including any balloon payment you may have organised, you will own the vehicle. The lender will remove the mortgage listed on the vehicle from the Personal Property Securities Register (PPSR), giving you complete ownership, free and clear. After this, you can use the car for business or personal purposes, sell the car, lease it for additional income, or trade it in for another vehicle.

Alternatively, you could choose to refinance the residual car value or trade in the vehicle at the end of the chattel mortgage period. This could potentially help you upgrade to a car model that better suits your changing needs, though the longer you’re in debt, the more you may pay in total for interest charges and fees.

Chattel mortgages are business transactions. You may be able to claim depreciation and enjoy other benefits available to business owners. These include: 

• Lower interest rates than some consumer car loans, plus there may be fewer account-keeping fees and other charges. Additionally, the interest rates are generally lower than unsecured car loans since the loan is secured by the value of the chattel.
• Getting ownership of the car at the time of purchase allows you to claim the GST paid on the car price in your next Business Activity Statement (BAS). This is only applicable if you’re registered for GST on a cash accounting basis.
• Other business benefits like depreciation and interest paid can also be claimed in your BAS, as the car is considered a business asset. Additionally, chattel mortgage GST is not chargeable in your monthly repayments, and only applies to the initial purchase price.
• Flexible repayment terms customised based on your needs and the cash flow projections of your business over 12 to 60 months. You can opt for regular repayments or choose a balloon repayment at a pre-determined time. The balloon payment can be anywhere between 0% and 60% of the car’s residual value and varies from one lender to another.
• You may be able to borrow more than 100% of the car’s purchase price with a chattel mortgage, which could help you cover add-ons and extra upfront costs like insurance.

While chattel mortgages have their potential benefits or advantages, they may also have significant risks to consider.

For example, chattel mortgages are not regulated by the National Consumer Credit Protection Act (NCCPA). Without this protection or regulation, lenders who offer chattel mortgages aren’t required to make the same checks as other licensed credit providers as per the regulatory guidelines. This could put some people at risk of overextending themselves financially, making them more likely to default on their repayments, affecting the business’s credit. Borrowers also may not be protected if they want to challenge confusing or unclear conditions of the chattel mortgage.

It’s also worth remembering that a chattel mortgage is similar to a secured car loan, which means your car is used as collateral for the mortgage. If default on your repayments, the lender might repossess the vehicle. This could put you in an especially difficult position if you used the car for work, as it may become much harder to earn your income. It’s important to plan your budget carefully to make sure you can afford to make the repayments and pay for your car.

If you’re trying to decide between a standard consumer car loan and a chattel mortgage, there are some similarities and differences you should consider.

Car loans often have higher fees and charges than chattel mortgages. Therefore, the overall cost of a chattel mortgage could be lower when compared to a consumer loan. However, interest rates and fees on both consumer car loans and chattel mortgages differ between lenders. Chattel mortgage lenders may also offer greater flexibility in repayment terms to suit borrowers’ needs than some lenders that offer consumer car loans. It’s worth comparing different car loan and chattel mortgage options before deciding on one that best meets your requirements.   

Another difference between chattel mortgages and consumer car loans is that you can only use a chattel mortgage to purchase a car that’s used for business purposes at least 50% of the time. A consumer car loan has no such restriction, and can be used to buy a car for business and personal use without any concern you may be using it too much for personal use. 

It’s also possible to get an unsecured consumer car loan that doesn’t require you to use your car as collateral for the loan. However, these loans tend to have higher interest rates and fees than secured car loans and chattel mortgages.

Overall, both options have different pros and cons. The right option for you will depend on your personal preferences and financial requirements. If you’re not sure whether a chattel mortgage or a car loan would best suit your needs or the needs of your business, consider contacting a financial adviser or finance broker for more information on what may be best for you. It may also be worth contacting the ATO and/or a tax accountant for more details of exactly how a chattel mortgage or car loan may affect your taxes and/or the taxes of your business.