Understanding Chattel Mortgages: A Guide for Australian Business Owners

When running a business, it’s common for owners to face financial road bumps along the way. Business equipment and vehicles can take thousands of dollars to acquire, which many owners don’t readily have in their pockets.

In such cases, business owners look outward for financing options. While bank loans and borrowing from friends remain a common option, another viable strategy Australian entrepreneurs can opt for is to apply for a chattel mortgage. 

Chattel mortgages are a great alternative financing scheme for business owners looking to own a vehicle and immediately benefit from it. 

In this article, we’ll get into closer detail on the intricacies of this financing mode. We’ll also show the consequences of non-payment and other things you need to know before applying for a chattel mortgage.

Let’s jump right into it!

How Do Chattel Mortgages Work?

A chattel mortgage is a type of car or equipment loan (or goods loan, in short) wherein the asset is used as collateral for the loan. The lender provides the borrower with immediate funds to purchase the equipment or vehicle. Then, the buyer immediately owns that asset. 

The asset (say, a vehicle) can be used for business operations. It can be used to generate profits and sales for the company. It can also be used for general operations, like driving staff around two warehouses. Taxable expenses like tax depreciation can be claimed.

The business will have to make monthly repayments to the lender until the end of the term agreement. The repayment amount will differ based on the terms of the agreement, but it’s typically paid in fixed instalments on a fixed term. 

This financing scheme also gives the borrower even more tax benefits from the purchase price and interest deductions. Once the buyer fully pays the interest and any pertinent balloon amount, then the goods are fully transferred to the borrower. 

However, if the borrower fails to make any of their payments on time, the lender has the right to call off the agreement and take possession of their collateral. The lender can choose to hold onto the asset until the borrower repays it or sell it to an external party to get back the value of their loan.

Learn more about chattel mortgages.

Benefits and Risks of Chattel Mortgages

It’s important to understand the pros and cons of choosing a chattel mortgage over any other type of financing. This can help you make an informed decision that aligns with your business needs and financial goals.

Here are some of the benefits of chattel mortgages for Australian business owners:

1. Immediate asset ownership: Businesses can scale their operations more quickly due to the sped-up acquisition of the asset, whether it’s a vehicle or a piece of equipment.
2. Tax advantages: Australian business owners can also claim tax deductions since the asset is their possession on paper. This applies to the goods and services tax (GST).
3. Fixed interest rates: Chattel mortgages offer predictable, fixed interest rates that make it easy for you to budget ahead.
4. Flexible payments: You can lower your monthly repayments by agreeing to pay a balloon payment by the end of the term. You can also choose to pay monthly, semi-annually, or annually. 

On the flip side, here are some risks associated with choosing a chattel mortgage over leasing or outright buying the asset:

1. Depreciation risk: Your total payment may be worth more than the asset’s value by the end of the term.
2. Default risk: If you’re unable to handle the monthly repayments, you’re vulnerable to repossession by the lender. This can also lower your credit score.
3. Lower tax benefits: While you can claim tax benefits, you can only claim a fraction of the vehicle depreciation, interest, and operating costs.

Having said all that, it’s important to be informed about your purchase and stay committed to the repayments to reap the full benefits of the deal. A goods loan can take one to seven years, so be sure that the timeline aligns with your business needs.

Eligibility Criteria for Chattel Mortgages

Chattel mortgages aren’t handed out to just anybody. You and your business will need to fulfil the following requirements to be deemed eligible for this type of loan:

• Full Australian citizenship or permanent residency
• A GST-registered business
• An active ABN or ACN
• Trading history of at least 6-12 months
• A bank statement
• A credit score of over 475
• Intent to buy an asset that qualifies to serve as collateral for a chattel mortgage

If you fit all the aforementioned requirements, you can get approval for a chattel mortgage with a lender.

How to Apply for a Chattel Mortgage

Once you’ve gathered all the documents, submit your application to your selected list of lenders and financial institutions. They will either approve, reject, or ask for modifications to your application. And from there, you’ll receive a quote for your mortgage.

Review their terms and pick the one with the most favourable terms. Once you’ve made your selection, sign the contract and abide by the terms stated. Be sure to make the monthly repayments promptly to avoid the risk of repossession.

Tips for Choosing the Right Lender for Your Chattel Mortgage

Your chattel mortgage agreement will last for years. As such, you want to ensure that you’re partnering with a reputable financial institution for your business.

Here are some tips on choosing the best chattel mortgage agreement:

1. Interest rates: Choose a chattel mortgage provider that has low interest rates. This can reduce the total cost of the loan.
2. Reputation: Choose a lender that is credible and has a proven track record. Major banks are typically reliable choices for chattel mortgage partners.
3. Term length: Choose a chattel mortgage provider that is willing to finance your business for a length of time amenable to your business needs.
4. Customer support: Opt for a lender with strong and quick customer support services. 
5. Flexibility: Choose a lender that’s willing to accommodate your needs.
6. Terms of lending asset: You also want to choose a lender that has loan terms that you agree with. This includes penalties, total loan price, balloon payments, and other variables. 

By scrutinising these factors, you’ll choose a lender that can help elevate your business to success.

Comparing Chattel Mortgages to Other Business Financing Options

Other business financing options may be worth considering over chattel mortgages.

A lease is an option if you don’t want to outright own a vehicle or piece of equipment. It essentially allows you to rent an item for utility purposes as an expense without having to shoulder the depreciation costs. 

Repayments tend to be on the lower end for lease agreements as well. Maintenance fees are also typically borne by the lender.

Hire purchase is an alternative financing option that works similarly to a chattel mortgage in that it binds a lender and borrower to buy a vehicle over a specific period of time. However, it differs in ownership. 

Through a hire purchase, ownership is transferred only when the final payment is done. This includes both the monthly repayment and the balloon payment. Furthermore, interest tends to be higher for hire-purchase agreements.

An unsecured loan is one where there’s no collateral. If you have a good credit score and a good relationship with a lender, you can choose this option. 

Just be sure that your cash flow can handle the monthly repayments of this option, as unsecured loans tend to have higher interest rates than average.