Chattel mortgage vs hire purchase: how do they compare?

As any Aussie business owner might know, purchasing vehicles outright isn’t usually the go-to option from either an accounting perspective or in terms of getting tax deductions.

Businesses often prefer a vehicle financing arrangement, but there are other choices to consider for any business owners looking to go down this path. For instance, you may be tossing up between a chattel mortgage or a hire purchase. The answer often depends on whether businesses want ownership of the vehicle.

Since chattel mortgages involve securing finance to purchase a vehicle, businesses own the vehicle and are responsible for maintaining it. This, however, is not the case with a hire purchase in which the company may not end up owning the vehicle and can include the cost of its upkeep in the loan amount.

How to choose between a chattel mortgage or a hire purchase

As the name might suggest, a chattel mortgage is essentially the equivalent of a home loan for cars. The word chattel refers to movable property, which in this case is the vehicle for which the loan is taken. Some lenders may allow businesses to opt for a balloon payment option, which may help to reduce your ongoing repayments until the final lump sum is due.

Chattel mortgages offer the additional advantage of being able to declare the vehicle as a business asset and claiming an asset write-off when filing business tax returns. Further, businesses can also claim a tax deduction on the depreciation, or loss in value, of the car.

At the same time, since the company is paying off the mortgage, the repayments can be included as a liability. Businesses need to remember that a chattel mortgage allows the lender to repossess the vehicle if they cannot repay the loan as per schedule.

Comparatively, a hire purchase usually involves leasing a vehicle for a fixed period, similar to a finance lease, but the repayments can be adjusted to include a balloon payment. While the business owns the car when taking out a chattel mortgage, in a hire-purchase, the lender is the owner from whom the car is borrowed.

In both cases, businesses can claim an input tax credit on the vehicle’s purchase price and interest payments if their cash accounting includes GST. With a hire purchase agreement, businesses using a non-cash accounting method can also claim input tax credits.

Before deciding whether to go for a chattel mortgage or a hire purchase, businesses should thoroughly discuss the accounting and tax implications with their accountants. They should also compare other options, including a chattel mortgage versus a finance lease, to make sure that all options have been considered.

Keep in mind there is more to a loan than its interest rates. Only comparing the interest rates offered by lenders won’t take into account potential tax benefits. Whichever option you choose, businesses need to ensure that the vehicle is largely used for business purposes. This requires keeping track of the hours the car was used for business-related activities.

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