For those who haven’t heard of a chattel mortgage, you might be wandering what this financial product is?
Simply put, a chattel mortgage is one form of secured loan where a moveable property (or chattel) is put up as collateral against the loan. It is a commercial form of financing, restricted to those who use their car the majority of the time for their business operations. However, because of this, it also offers numerous benefits to small and medium business owners. Let’s take a look.
The Structure and Mechanics of a Chattel Mortgage
- A business owner requests a chattel mortgage from a financier in order to access funds that they may borrow to purchase a car – it may typically have a term of between 1-5 years with monthly repayments in advance or in arrears, and the option of a balloon payment
- The chattel mortgage loan may be subject to either fixed or variable interest rates, although they are lower than equivalent unsecured loans
- The business owner may take ownership and commence using the vehicle straight away, as opposed to waiting like they would if it were under lease
- The vehicle is registered on the Personal Properties and Security Register by the lender, who maintains the title of the vehicle
- When the chattel mortgage has been repaid in full, the business owner receives the title in their name
- Should the business owner default on the loan, the financier may take possession of the vehicle and sell it in order to mitigate any losses, while still reserving the right to pursue any shortfall
Managing Cash Flow
With lower interest rates, a chattel mortgage will reduce your interest costs and free cash for other areas of your business. In addition, because the repayment terms of a chattel mortgage are somewhat flexible, you can manage these to fit around the operations of your business, such that you maximise your cash flow. One of the most common ways to do this is through a balloon payment at the end of the loan, particularly if the business is expected to grow before then. However, the resale value of the car could also be less than the balloon value, so keep that in mind.
Tax Planning Incentives
As an asset being used for business purposes, you can also achieve significant tax breaks by using a chattel mortgage. The vehicle purchase price is subject to GST, however, there is no GST payable on any balloon payment or each monthly payment. Business owners can claim an input tax credit on the GST component of the purchase up front as it is financed. Other deductions are also available for depreciation, running costs and interest payments.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.