Hire Purchase or Chattel Mortgage?

To choose the right finance option for your business, you'll need to understand the options that are available, and how each option will help you to reach your business goals.

In this article we'll compare two business car loan options, the popular chattel mortgage, and a hire purchase agreement, so you can identify which option will benefit your current business model.

Hire purchase or chattel mortgage?

Both a hire purchase agreement and chattel mortgage are vehicle loans to purchase equipment or cars for use primarily in business. Since the introduction of new GST rules in 2012 and the Business Activity Statement (BAS), chattel mortgages have been more popular due to the tax advantages.

To be eligible for either of these business loan options, you will need to have a valid Australian Business Number (ABN) and be registered for the Goods and Services Tax (GST).

Here's now each finance option works:

Chattel mortgage

A chattel mortgage is essentially a secured car loan, tailored specifically for business use. It doesn't fall under the National Consumer Credit Protection Legislation (NCCP), so lending criteria can be more relaxed than for consumer credit.

When you purchase a vehicle using a chattel mortgage, the business owns the car from the beginning, while the lender registers a security against the vehicle for the duration of the loan term.

You can put a deposit towards a chattel mortgage to reduce the interest you'll pay on the loan and keep the loan term shorter.

Tax with a chattel mortgage

Taking full ownership of the vehicle means that you'll be able to claim the full input tax credit in your next BAS statement, immediately claiming back GST on the purchase, as long as your business is registered for GST.

You can also claim for depreciation, running costs, and interest on the loan.

Record-keeping requirements

To show that you're using the vehicle for business purposes you will need to keep a logbook for twelve weeks to demonstrate the tax-deductible portion of the vehicle use.

Balloon payment and loan term

A chattel mortgage has a fixed loan term and usually has a balloon payment that falls due at the end of the loan term. This lump-sum payment can either be:

• Paid out in full so the business takes clear ownership of the vehicle
• Refinanced into a new loan
• Paid out by trading in the vehicle to conclude the loan.

A chattel mortgage will often have flexible repayment options, allowing you to make payments that fall in line with your business cash flow.

If your business has a sporadic cash flow, make sure you discuss this option with your lending manager to be matched with a lender who'll provide this feature, and reduce stress on your business cash flow.

Hire purchase agreement

A hire purchase is different from a chattel mortgage as the lender effectively owns the vehicle during the loan term. In return for use and possession of the vehicle, your business will pay instalments to the finance company. Once the loan amount is paid in full, legal ownership of the vehicle transfers to the business.

You can't put a deposit towards a hire purchase agreement, as the asset is owned by the lender that purchases the vehicle and leases it back to you.

If you have already purchased the vehicle, you may have the option to sell it to the lender and lease it back under a hire purchase agreement.

Tax with a hire purchase agreement

Under a hire purchase agreement, you can claim interest on the loan, depreciation and running costs against business income.

GST is payable at the settlement of the hire purchase agreement and can be claimed as an input tax credit on the next Business Activity Statement (BAS).

Record-keeping requirements

To claim business-related running costs, you'll need to complete a logbook for twelve weeks.

Balloon and loan term

A hire purchase agreement has similar loan term options to a chattel mortgage, typically three to five years. At the end of the loan term, you can choose to pay a lump sum or balloon payment. This acts to reduce the repayment amounts during the loan term.

Once the residual or balloon payment is made in full, the business takes full legal ownership of the vehicle.

Choosing a business car loan

To apply for a business car loan, consult your tax advisor and speak to an experienced lending manager about your specific use case. With the right advice, you'll be matched to a business car loan that will maximise the potential of your working capital.