How a Chattel Mortgage Benefits Small Businesses
Small and medium-sized enterprises with tight cash flow and in need of a vehicle for business purposes can benefit from a chattel mortgage.
A chattel mortgage is a type of secured loan in which a chattel or movable property like a car serves as collateral for the loan. As a commercial car loan, it is intended for businesses that need a vehicle for at least 50% of the operations. Its features help many SMEs manage their tight cash flow and maximise their tax savings.
How It Works
- The lender provides the borrower with the money to purchase the vehicle.
- Unlike a lease, the borrower can possess and operate the car immediately after purchase.
- The lender, however, keeps the title of the vehicle and registers it on the Personal Properties Security Register (PPSR).
- The borrower gets the vehicle’s clear title once the loan is repaid in full.
- If the borrower defaults on the loan repayment, the lender can repossess the car and sell it to recoup the money.
- Flexible contract terms, usually ranging from one to five years
- Option to reduce the monthly payments through a balloon payment
- Interest rates are lower than unsecured loans
- Options for fixed-rate payment (interest rate stays the same for the entire duration of the loan) or variable rate payment (interest rate varies according to the changing market interest rates)
- Monthly repayments may be payable in advance or in arrears
Since the mortgage is secured against the vehicle, a chattel mortgage generally has lower interest rates. This allows business owners to spend more money on investments.
The flexible loan lengths and payment options of a chattel mortgage can make the vehicle less expensive and allow businesses to tailor their loan repayments according to their cash flow.
- Length of Term. Businesses can choose loan terms between one to five years. The ‘right’ term length should take into consideration the distance of the vehicle’s travels in one year, its depreciation rate, and its forecasted end-of-term value.
- Balloon Payment. Businesses with limited cash flow but are expecting to make more money in a few years can opt for lower monthly repayments with a higher end-of-term balloon. However, those who are planning to sell their vehicle in a few years should think twice about opting for a balloon payment contract since the balloon could become greater than the resale value.
- Deposit. A huge deposit can be employed to reduce the size of the loan. However, some businesses choose not to do this, adding the money to their business capital instead.
Because the car is used for business purposes, its payments are tax deductible. Goods and Services Tax (GST) is charged on the purchase price but not on the monthly repayments and contract balloon amount. The GST is also financed, entitling the borrower to claim an input tax credit up front.
Tax deductions can also be claimed on:
- Interest payments
- Running costs of the vehicle
Is a chattel mortgage right for your business?
The flexible loan options and potential tax benefits of a chattel mortgage are beneficial for small and medium-sized businesses. However, there are other car loan options to choose from, including Novated Lease and Low Doc Car Loans. The best car financing is one that suits a business or an individual’s unique circumstances and preferences.
Use our car loan calculator to get an estimate of the savings you could enjoy with a chattel mortgage.