In car, truck & equipment finance, Chattel Mortgages are now a very popular option among business owners. The term Chattel Mortgage which refers to the finance agreement which funds are provided to purchase an asset. Some lenders sometimes refer to a Chattel Mortgage as an equipment or car loan.
Chattel Mortgages are a similar structure to a traditional home loan, the lender uses the car or equipment you purchase as security for the loan, the Chattel refers to the car or equipment and the mortgage refers the loan.
A Chattel Mortgage gives you ownership of the equipment straight away, unlike a Hire Purchase or Finance Lease, you then pay off the loan with the income generated by the asset to your business.
What are the benefits of a chattel mortgage?
- The loan terms are flexible, with options of 2 to 5 years
- Lower interest rates than a Hire Purchase or an unsecured loan
- Flexible repayments. Repayments can be fixed to the same amount monthly, or structure to fit your business requirements if you have a seasonal cash flow business
- Up front ownership of the asset, it will appear on your balance sheet showing as a liability straight away
- A balloon or residual payment can be set at the end of the term to lower your monthly payments
Tax implications
With a chattel mortgage, the goods and services tax (GST) inclusive purchase price of the car or equipment is financed and you’re entitled to claim this back when your next BAS Statement is lodged.
For instance, if you finance a truck for $110,000 including gst. There is $10,000 in GST you can claim when you finance through a chattel mortgage structure.
You are also be able to claim interest and depreciation costs as well which is also a big win.
As always, it’s a good idea to seek advice from your accountant regarding your circumstances and tax impacts just to be sure a Chattel Mortgage is good for you.
What’s a balloon payment?
A balloon payments or residual amount is a nominated amount which is not paid off until the end of your agreement. Businesses will use a Balloon payment to decrease their monthly repayments. The higher the balloon payment, the lower your monthly repayments are going to be.
However, you have to keep in mind that the higher your balloon payment, you will end up increasing the amount of interest you pay over the loan term as the principal loan amount isn’t paid down as quickly.
For cash flow purchases, you might choose a balloon payment apurely to keep the monthly repayments lower over the loan term. It’s always important to ensure that the balloon payment you decide on putting on your loan is manageable at the end in case you want to sell the asset and pay off the finance.
We do have Lenders on our panel that will refinance the balloon payment so if you ever get caught out please give me a call.
Are there any other things to consider?
It is important, as with all finance agreements, to way up how long you expect to use the equipment or vehicle for your business and your forecasted cash flow expectations.
For the best possible finance package, it does come down to the negotiating the final cost of the vehicle, truck or equipment and if there are any additional finance charges that apply (e.g. admin fee, monthly account keeping fees, PPSR registration fees etc).
Want to know more? Please feel free to call Scott Rumble on 0401 214 427 or email at scott@yakkafinance.com.au to find out more.
