Chattel Mortgage or Consumer Car Loan, which should you choose?
If you’ve decide the time is right to purchase a car, the process for securing a car loan is generally rather straightforward. However, your reason for buying the vehicle will have an enormous bearing on the type of car loan that is best for you.
Given there are a number of options available, with each having their own benefits, it’s important you speak with a qualified and experienced chattel mortgage lending manager to ensure you get the best loan for your particular set of circumstances.
Is your car for business or personal use?
If you intend to use the vehicle for businesses purposes more than 50% of the time, your car loan options increase.
A consumer car loan is the most common option if the car is to be used predominantly for private use, while chattel mortgages have excellent benefits if your car is to be used mainly for business purposes.
Consumer car loans vs chattel mortgages
Consumer car loans and chattel mortgages are very similar in the way they are structured. A bank or financial institution provides funds to purchase a car, the borrower makes regular periodical repayments (principal and interest) for a set period of time. Then, at the end of the loan agreement the borrower takes full and clear ownership over the vehicle.
The lender will register their security interest in the vehicle on the Personal Property Security Register (PPSR) for the life of the loan, but the borrower will have full ownership rights.
What's the difference between a consumer car loan and a chattel mortgage?
One key difference in the structure of these two loan options is the security, or chattel.
Consumer car loans can be either secured (against the vehicle or other personal property) or unsecured, while for chattel loans the car is the security.
Chattel mortgages also offer a balloon payment option, a pre-agreed amount the borrower must pay at the end of the loan to take full ownership of the vehicle.
Benefits of chattel mortgages to you
Because chattel finance is considered a business transaction, there are additional benefits that make them a fantastic option for business owners when compared with consumer car loans.
- Lower interest rates - Because there are usually fewer fees than for a consumer car loan, and the car is used as security, chattel mortgage rates are often lower.
- Claim the GST immediately - Because you take ownership of the car immediately, you can claim any GST paid on the price of the vehicle in your next Business Activity Statement (BAS) if you are registered for GST on a cash accounting basis.
- Other tax benefits - Because the vehicle you own is considered a business asset, you can claim depreciation and the interest portion of the loan repayments in your BAS. Also, chattel mortgage GST is not charged on the monthly repayments, only on the initial price of the car.
- Flexible terms - Lenders are flexible with loan repayment amounts to suit forecasted cash flow projections of the business. Choose the length of the loan (generally 12-60 months), and the repayment amounts within parameters set by the lender. You can either choose repayment levels so there is no final balloon payment, or decrease the repayment amounts, thus increasing the final balloon payment. The lender will limit how big the balloon payment can be, but could range anywhere from 0% to 60% of the value of the vehicle. To work out the right repayment amount and balloon you can use a chattel mortgage repayment calculator.
- 100% finance - If you choose you can roll insurance, maintenance and other add-ons into the total cost, so there’s no initial financial outlay.
- Trade in - To offset the cost of each loan repayment, you can trade in a vehicle or pay a lump sum amount at the start.
Are there any downsides to a chattel mortgage?
Just one, chattel mortgages aren’t regulated by the National Consumer Credit Protection Act (NCCPA). One of the major roles of the NCCPA is to look out for unscrupulous lenders who loan money to people who are unable to pay it back, and fail to provide other safeguards when approving loan applications.
The problems for business owners taking out a chattel mortgage include:
- Lenders not running credit checks on people applying for chattel finance.
- The borrower isn’t protected should they wish to challenge unclear or confusing terms and conditions of the loan.
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.
To find out when this will be you can use a chattel mortgage calculator to work out your loan term, based on how much you an afford to pay each week, and how much you want to borrow towards a car.
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.