How Does A Chattel Mortgage With A Balloon Payment Work?
A chattel mortgage with a balloon payment is a secured car loan for business, with a lump sum payment that falls due at the end of your loan term.
Not every chattel mortgage will come with a balloon payment, but here's some reason why a business owner would choose to take a balloon payment:
- Shorter total loan term
- Lower payments during the loan
- Structure payments due to match business cashflow
There is a catch to taking out a balloon payment, and that is the fact that you'll pay interest on the balloon amount for the duration of the loan term.
Chattel mortgage with a balloon payment
Choosing a chattel mortgage with a balloon payment is a business decision that you should discuss with your accountant. To make the right decision, you'll need to take into account:
- Your business income
- Expected turnover and surplus
- Depreciation of the vehicle
- The amount you spend on the business vehicle
How much will my balloon payment be?
Your final chattel mortgage balloon payment will be expressed as a percentage of the total car loan. You can work out what this will be as a dollar value at the end of the loan term using a loan calculator to multiply this sum by the interest payable on your car loan.
When you apply for a car loan, and you're considering taking out a balloon payment option, discuss with your lending specialist what the total amount due at the end of the loan term will be so that you can save this amount.
Why choose a balloon payment on a chattel mortgage?
Choosing to take out a balloon payment option on your chattel mortgage can give you more flexibility with your car purchase.
Keep your money working in the business
With lower repayments and no requirement for a loan deposit when you take out a chattel mortgage with a balloon payment, you can keep your working capital in the business.
You'll also increase lender confidence for future loans by proving that you can meet a lump sum payment after building equity in your loan with regular payments.
Depreciation matching
Using a chattel mortgage with a balloon payment can help you structure the loan so that the principal owing is closer to the actual value of the vehicle at any point in time. This way if you sell the vehicle, the proceeds of the sale will cover the balance of the loan.
Increase your initial maximum loan amount
Using a chattel mortgage with a balloon payment may allow you to buy a newer vehicle than if you'd opted for a standard car loan.
What other alternatives are there?
A chattel mortgage is a car loan specifically for business use, so if your vehicle won't be used for business more than 50% of the time, you'll need to look at some other car loan options, such as a secured car loan.
You might also choose to lease the vehicles you drive in the business.
If you are using the vehicle more than 50% of the time for business purposes, you might take out a chattel mortgage with no balloon payment.
If you definitely want to purchase a vehicle that you'll use in the business over the long term, then you might decide to provide an upfront deposit on the car to reduce your loan amount. This way, at the end of the loan term the vehicle is yours with no more to pay, and your loan principle will always be less than the current value of the car as it depreciates.
What happens If I can't pay the balloon at the end of the loan?
If you don't have a lump sum to pay out the amount owing on your chattel mortgage at the end of the loan term, you might decide to refinance the amount of the balloon to a new loan and pay it off with ongoing regular payments.
Maintain a new fleet with balloon options
Some businesses who prefer to run new vehicles will use a chattel mortgage with a balloon as a strategy for upgrading the car at the end of the loan term. The business will trade in the vehicle to pay out the balloon amount owning, and simply take out a new chattel mortgage to upgrade to a new vehicle.
How do I choose the right chattel mortgage?
To choose the right chattel mortgage structure for your next business car loan, you should seek advice from both your financial advice professional, a tax accountant, and finally a professional lending expert.
With your business financial information and an overview of how the vehicle will be used within the business, a lending manager will be able to match you with a chattel mortgage that suits your financial profile and business cash flow.
Tom Caesar is the Managing Director of The Positive Group, a group of Australian financial services companies offering a broad range of finance to clients Australia wide. The Positive Group assist clients in the areas of car finance, mortgages, insurance & wealth management. Tom has been in car & asset finance for over 10 years. Tom regularly contributes articles on car finance, insurance, technology and business growth, drawing on his experience of starting his own brokerage in 2009.