If you’re contemplating a car purchase for your business, you have several options available to you, each with their own pros and cons. One option is a chattel mortgage, where the car is used as the security for the loan.
At the outset of the loan, the lender provides you with the funds, you take ownership of the vehicle and then own it outright on completion of the loan term, usually between two to five years but sometimes up to seven years.
How does a chattel mortgage work for car finance?
A chattel mortgage for a car loan works in much the same way as a secured personal loan for a car, where a lender provides you with the funds and you take immediate ownership. The lender takes a ‘mortgage’ over the vehicle as security for the loan and once the contract is completed you own the vehicle outright.
Car loans and chattel mortgages have other similarities such as the ability to opt for a fixed or variable interest rate and the length or term of the loan.
Differences between chattel mortgages and car loans
The difference between a chattel mortgage and a more conventional car loan is that a chattel mortgage is designed for business purposes. So you’ll be required to use the car predominantly for business use, which is considered 50% or more of the time.
As a business loan, you may be entitled to a slightly lower interest rate than you’d get for a secured personal loan or car loan. As with most loans, the best interest rates are offered to borrowers with the best credit ratings. And the longer your business has been successfully up and running, the better.
You may also be entitled to certain tax benefits if the vehicle is used for business purposes. Additionally, you should be able to claim an input tax credit on the Goods and Services Tax part of the vehicle’s cost on your Business Activity Statement for that quarter. Some of these benefits also will be available with conventional car loans when you use your car for your business. So it always pays to check with an accountant about the specifics of your particular contract of sale.
Additionally, a chattel mortgage gives you the option of making a balloon payment, which is an outstanding amount that becomes payable at the end of the loan term. So, for example, if you borrow $30,000 for a new car over seven years, you can opt to pay back $20,000 monthly over the loan term and the final $10,000 in one lump sum at the end of the term.
This could be good for cash flow purposes as your monthly repayments are less, just as long as you plan to have to pay a lump sum of $10,000 at the end of the term. You also will be paying more interest overall because the principal is being paid off more slowly.
Some lenders also provide more flexible payment options for chattel mortgages that are in sync with the cash flow of your business, which could be seasonal. Under these circumstances, you may be able to make quarterly, half-yearly or even annual payments as opposed to the fortnightly or monthly payments associated with conventional car loans. Always check with your lender first if you think you could use such an option.
One final distinction worth noting is that chattel mortgages are not covered by the National Consumer Credit Protection Act, which means that, on the one hand, it might be easier to get a loan from a lender that doesn’t require as much documentation. It also means, however, that borrowers are not protected in case of unclear terms and conditions, which could leave you liable for more fees and charges mentioned only in the fine print of the loan.
Other business car finance options
There’s no shortage of competition for your money in the marketplace, so you may want to consider all your options to find the best one for you. If, for example, your cash flow is inconsistent, then a chattel mortgage with a flexible payment structure might be the way to go. Whereas if you require a fleet of vehicles for just a short period of time, you’d be much better going for a lease arrangement. You should also talk to an accountant about the tax implications of your loan and how you use the vehicle.
Apart from a chattel mortgage, you could opt for one of the following:
- A conventional car loan: As already discussed, a car loan is like a personal loan for a specific purpose. Interest rates on car loans are usually cheaper than for other types of personal loans, provided you have a good credit rating. Plus, you can use your personal car for business purposes and claim tax advantages, as long as you keep fairly extensive records. This may be a better option if you only use your car infrequently for business and you don’t require any of the repayment flexibility available through a chattel mortgage.
- Commercial hire purchase: Unlike with a chattel mortgage or a secured car loan, with a commercial hire purchase, the lender purchases the car on your behalf and you hire it from them for the term of the loan. Ownership then transfers to your business at the end of the loan term. Repayment arrangements are generally even more flexible than chattel mortgages and there are beneficial tax arrangements, though your business is still liable for servicing and repairs on the vehicle.
- Financial lease: A finance lease arrangement is where the lender provides the money to buy the car, then lends it to your business over the term of the lease. At the end of the term, you have the option of either buying the vehicle outright, taking out a new lease or the financier takes back the car. Finance lease payments are tax deductible as a business expense and these arrangements will suit you if you want to drive a new vehicle every few years and don’t want the hassle of an ageing car and the upkeep associated with it.
- Operating lease: An operating lease is similar to a financial lease except, in this case, you are only hiring the vehicle for a specified term, after which time the finance company takes it back. Businesses that benefit most from this arrangement are those with a high turnover of vehicles. Operating lease payments tend to be higher than other types of financing but will often include repairs and maintenance, depending on the arrangement you have with your lender.
- Novated lease: A novated lease involves a unique arrangement where an employee can lease a company car and salary sacrifice so the repayments are deducted from their gross salary. This arrangement can be highly beneficial for the employee as it has big taxation benefits, thanks to the payments coming from their pre-tax salary. Businesses can offer novated leases as an incentive for staff or as a reward similar to that of a bonus.