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Everything You Need To Know About Chattel Mortgage For Small Businesses

Whether you’re a sole trader or run a small-sized business, owning a commercial vehicle is a necessity in today’s time. If you depend on a rented commercial vehicle for your daily business needs, it will only add up to your expenditure leaving you with limited or no resources.

Chattel Mortgage Business

If you’re searching for the most appropriate finance option that can work as an excellent cost-cutting strategy, then you might want to consider a chattel mortgage. With the number of benefits it has to offer, it can prove useful for small businesses. How?

Well, it allows you to directly borrow money from finance lenders or agencies to buy the vehicle you require to run your business smoothly. The mortgage applied is on the vehicle, over which the lender charges the interest. And once the loan amount is paid off, the ownership of the vehicle gets transferred to you.

Chattel Mortgage

What are the features of chattel mortgage?

Here are some basic features associated with chattel mortgage business:

  • The lender finances 100% of the vehicle's price.
  • The owner gets the possession of the vehicle as soon as it is purchased. Hence, it’s considered as an asset for the business and can be shown in the balance sheet.
  • When the loan amount is paid off, ownership of the vehicle is passed immediately to the business owner.
  • Monthly installments and interest rate, both are fixed.
  • Business owners/sole traders have the option to pay a significant amount of deposit to bring down the installment amount.
  • Business owners/sole traders can finance it in a customized way, as per their budget and requirements. They can choose time duration anywhere between one and five years
  • If the business is GST-registered, owners can claim GST on vehicle price in the very next business activity statement (BAS).
  • The balloon payment or final residual amount can be settled at a mutually agreed time between the lender and owner ( generally a fixed percentage as stipulated by the lender).

A chattel mortgage thus seems to be the best bet for small business looking for these features.

Chattel mortgage business benefits

How can your business benefit from a chattel mortgage? Let me explain.

Chattel Mortgage Business-1

1. Interest

The interest rates for such a mortgage range from 4.85% to 5.72% with leading financial institutions of Australia. These rates are comparatively less than those associated with other car loans. When comparing interest rates from different lenders, you must keep an eye on additional benefits as they might vary from one lender to another. 

 

2. Depreciation

When your vehicle is used mostly for business purposes, and the amount borrowed for lease is below the depreciation limit given by Australian Taxation Office, in that case, the lease can be put under the tax deduction scheme. 

3. Tax

Tax terms are simple to understand. Let me explain in three aspects –

  • It’s possible to claim GST that has been paid while purchasing the vehicle
  • It’s possible to claim depreciation under tax deduction
  • It’s possible to claim interests under tax deduction

It’s always better to take advice from your tax consultant or accountant while seeking tax deductions as specific eligibility rules may apply.

Downsides to note

I must show you both sides of the coin. Here are certain aspects to be taken care of before you apply:

  • Chattel mortgage is not regulated under National Credit Consumer Protection Act (NCCPA) like other loans. It means there’s no 100% protection. Hence, remember to select reliable finance lenders who make fair deals.
  • There are no deductions applicable on balloon payment and monthly instalments.
  • If the business owner wants to claim GST, then it requires a lot of paperwork. Hence, it’s better to seek help from an accountant.

Chattel mortgage vs consumer loan

 Chatter mortgage is similar to consumer loan; however, certain differences are to be understood. One of the major ones is security. Most of the consumer car loans are secured, while some part of the protection is taken away in case of chattel mortgage business. Therefore, certain aspects like charges, fees, or penalty are not mentioned under terms and conditions section, which can add up to a lot in the long run. 

Furthermore, there are chances of getting the advantage of lower interest rates in the case of chattel loans, as the borrower and lender can come down to their terms, which is not quite possible with consumer car loan. The rates are already fixed and regulated by NCCPA in case of consumer loans. Also, the chattel loan comes with a lot of flexible options such as structuring of balloon payment and setting up of the loan term duration to suit your requirements.

How to apply?

The application process for a chattel mortgage is similar to that of a regular loan, and it can be paid off as discussed with the lender. It can be weekly, monthly, or as arranged. There are primarily two options for the business owner – either pay the deposit money for the mortgage or trade in with an old or existing vehicle to use the mortgage. When in doubt, you can always use a chattel mortgage calculator to estimate how much you’ll have to pay with inputs such as interest rate, term, and loan amount. Furthermore, you can request a quote from any finance lending company or get advice from your accountant.

 Conclusion

As you can see, chattel mortgage offers plenty of advantages for sole traders/business owners. Some other benefits include lower operating expenses and overhead costs when compared to other loans. However, it’s always better to do your research, understand pros and cons, and then make a sound decision. I hope my suggestion to apply for a chattel mortgage will solve your problem. Good luck!

Disclaimer

Please always seek tax advice from your accountant before entering any financial product.

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