How does a chattel mortgage work?
A chattel mortgage and a secured car loan share the same fundamental structure:
- A lender provides the finance for you to purchase a vehicle, which you own immediately.
- The lender then takes a ‘mortgage’ over the vehicle as security for the loan.
- Once the contract is complete, the mortgage is removed, and you have clear title to the car.
Both loan types also offer similar features, like the choice of a fixed or variable interest rate and flexible loan terms.
Learn more about a chattel mortgage loan structure.
Chattel mortgage vs traditional car loan
On the surface, any loan that gets you a new vehicle might seem like a good choice. However, for a business owner, the decision between a chattel mortgage and a traditional car loan is a critical one that can significantly impact your cash flow, tax obligations, and overall financial strategy.
The fundamental difference is simple: a specialised commercial product offers features that benefit your business, while a standard consumer loan provides a general financing solution. Understanding which one to choose is key to making the smartest investment for your company.
A chattel mortgage is exclusively for business
The fundamental difference is that a chattel mortgage is a commercial loan. To qualify, you must use the vehicle for business purposes at least 50% of the time.
Unique financial advantages of a chattel mortgage
- Lower Interest Rates: Businesses may be offered more competitive rates than personal loan applicants.
- GST Benefits: You can typically claim the GST on the vehicle’s purchase price back on your next BAS.
- Tax Deductions: The vehicle’s depreciation and loan interest are often tax-deductible.
A chattel can be flexible
- Balloon Payments: You can choose to pay a final lump sum at the end of your loan, which lowers your regular monthly repayments to improve cash flow.
- Flexible Schedules: Some lenders offer repayment plans that match your business cycle (e.g., quarterly or annually) instead of a fixed monthly schedule.
A chattel mortgage has different regulations
- Not Covered by Consumer Protection: Chattel mortgages are not regulated by the National Consumer Credit Protection (NCCP) Act.
- Pros & Cons: This can mean an easier application process but also means you have fewer protections against hidden fees or unclear terms. This can be one of the disadvantages of a chattel mortgage, so diligence is key.
Why choose a chattel mortgage?
Businesses primarily choose a chattel mortgage to gain significant tax and cash flow advantages from a product specifically designed for them.
Unlike a traditional car loan, a chattel mortgage allows a business registered for GST to claim the entire GST portion of the vehicle’s purchase price upfront in their next Business Activity Statement (BAS). This provides an immediate and substantial cash injection back into the business. Furthermore, because the business owns the vehicle from day one, it can typically claim the loan interest and the vehicle’s annual depreciation as tax deductions, further reducing its overall tax liability.
Beyond the tax benefits, a chattel mortgage offers superior flexibility in managing business finances. It provides the option of a balloon payment, which is a larger, final payment at the end of the loan term. This structure significantly lowers the regular monthly repayments, freeing up essential working capital for other business operations and investments. This level of customisation, combined with the powerful tax advantages, can make a chattel mortgage a strategic financial tool for a business, rather than just a simple loan to acquire a vehicle.
Why choose a traditional car loan?
A primary reason for choosing a traditional car loan is its simplicity and accessibility, especially for new or emerging businesses. If you are a sole trader or your business has a limited trading history, qualifying for a commercial product like a chattel mortgage can be challenging.
A traditional secured car loan, based on your personal credit history and income, often presents a more straightforward path to approval. The application process is familiar and typically requires less business-specific documentation, making it a faster and less demanding option when you just need to secure a vehicle quickly to get your operations moving.
Furthermore, a traditional loan is the logical choice if the vehicle will have significant personal use. To claim the full tax benefits of a chattel mortgage, you must use the vehicle for business more than 50% of the time. If your usage is mixed and doesn’t consistently meet that threshold, choosing a standard car loan helps you avoid potential complications with the ATO. Furthermore, the National Consumer Credit Protection (NCCP) Act fully regulates these loans, which in turn offers you robust protection, clearer terms, and a transparent fee structure.
This provides a valuable safety net, ensuring you are less exposed to the fine print and potential hidden costs that can sometimes be a risk with unregulated business loans.
Note: Always consult an accountant to understand how these benefits apply to your specific financial situation before making a decision.
What happens at the end of a chattel mortgage loan period?
Once you’ve made all of your loan repayments, plus any agreed balloon payment, the vehicle is yours to keep. The lender will remove their security interest in the vehicle on the PPSR, and you will have clear ownership.
At this point you can do whatever you want with it. You can continue to use it for business purposes, or it could become the private family vehicle…the choice is yours. Other options include selling it to raise cash, trade it in to reduce the loan repayment costs of your next car finance, or lease it to another business to provide an additional cash flow source for your business.
If you have any further questions on chattel mortgage or have some other points you’d like to add leave a comment below.
Positive Lending Solutions has a team of commercial loan experts who help business owners across Australia get the funds they need to start a new business take their current business to the next level.
Call 1300 722 210 or request a Quick Quote now.
