What is Chattel Mortgage?
Chattel Mortgage & Car Finance Basics
A chattel mortgage is essentially a car or equipment loan for business purposes. If you run your own business or you’re an employee who intends use your vehicle for work, taking out a chattel mortgage is the most popular finance option! But if you’re like most people, you’ve probably never even heard of a chattel mortgage. Read on to find out everything you need to know!
What is a chattel?
In legal terms, any movable personal property is called a chattel. The word itself comes from the French language. Examples include cars, furniture and business equipment. Land isn’t an example because it’s not movable.
What is a chattel mortgage in Australia?
A chattel mortgage is a type of car loan for a business vehicle. If you’re running a business, you can use the car you’re buying as security for your loan. The benefit of doing that is a lower interest rate than taking out an unsecured car loan.
Chattel mortgage definition
A chattel mortgage can be legally defined as a secured loan. In Australia, it’s most often used for buying business vehicles. The chattel is the vehicle and the mortgage is the loan.
The lender registers a legal interest in the vehicle until the loan is fully repaid. They do this registration on the Personal Property Securities Register (PPSR). Anyone can check the PPSR online to see if there is money owing on a vehicle. Once the loan is repaid, the lender’s PPSR entry is removed.
The difference between a lease and a chattel mortgage
There are several key differences.
- You immediately take ownership of the vehicle with a chattel mortgage. Leasing is like renting a car. If you take out a lease, you usually only have the option to buy the car at the end of the lease.
- If you get a chattel mortgage as a business or a sole trader you can typically claim the full cost of the vehicle as a tax deduction under the Temporary Full Expensing scheme (formerly known as the Instant Asset WriteOff). Check with your accountant.
- Chattel Mortgages typically attract lower interest rates than leases.
3) Lease payments are subject to 47% fringe benefits tax (FBT) in Australia. Chattel loan payments are not subject to FBT. However, leases are often part of salary sacrificing arrangements. This means that leasing can reduce the amount of tax you pay on your salary/wages.
4) If your business is registered for GST, you can claim the car’s GST as a credit in your next business activity (BAS) statement. You can’t do that with a lease.
5) Lease payments usually include vehicle running costs. Chattel loan repayments don’t.
What is a chattel mortgage used for?
A chattel mortgage can be used to buy any asset for business use in Australia. However, it’s most commonly used for cars and equipment. Whether you are a business owner, a sole trader, or an employee using their vehicle for work, as long as you use your car for business purposes at least 50% of the time, you can qualify.
BENEFITS OF A Chattel mortgage
David is a self-employed tradie and he needs to buy a new ute. He uses his vehicle Monday to Friday for work. He drives it on the weekends for personal use. David’s business is registered for GST. He gets some advice from a car finance broker and his accountant. He decides to take out a chattel mortgage because it will allow him to:
- claim the GST on the ute in his next BAS.
- Expense the full cost of the vehicle on his annual tax return.
- avoid paying FBT
- have a lower repayment than taking out a lease
- own the vehicle instead of having a future option to buy it.
Disadvantages of chattel mortgages
The main disadvantage is that a lender has the legal right to repossess your car if you don’t make your repayments. The lender can then sell the car and take the money you owe on it.
What is a chattel mortgage fee?
The major cost is interest. However, lenders can also charge other fees. There are usually two interest rates advertised. Look at the higher one when comparing your options because it’s the real cost of the loan. Speak to your broker to gain an understanding of what fees are applicable.
Making a chattel loan application
It’s worthwhile talking to a finance broker to find out your options first. You’ll also need to get some information together, including details of:
- the vehicle you want to buy
- how much you want to borrow
- as much proof of business income as you can provide. For example, recent tax returns and bank statements. (if you are unable to provide these, your broker will be able to recommend low doc options)
All this information can help you to get a great deal.
Still have more questions? Check out our answers to chattel mortgage FAQs here.
How we can help
If you’re self-employed and need a loan for a new vehicle, talk to our expert brokers at Auto Car Loans. We are experts in chattel mortgages and can offer multiple low doc options and approval pathways. We specialise in vehicle finance and we make sure our clients get a great deal. We’ll take the time to understand your specific needs and provide you with the right advice.
Simply call 1300 301 051 to find out more.
DISCLAIMER : The thoughts and opinions conveyed on this website are those of the authors only and are of a general nature. This does not constitute financial or general advice to you from Auto Loans Group. You should seek your own independent advice from a professional which is specific to your circumstances before considering any of the items referred to in this article, including finance, insurance, and car buying.