When researching car finance deals, the options can be seemingly endless. While most private buyers will go with a personal car loan there are many more varied and complex options available to those who plan to use the vehicle for business purposes.
That’s where Chattel mortgages come in to play.
What is a Chattel mortgage?
‘Chattel’ means a moveable piece of property so a ‘Chattel mortgage’ is simply a loan option for this type of property, typically a car. However, it’s important to understand from the outset that this borrowing option is designed for business use only, so to start with, you need to use your car primarily for work use.
Under a Chattel Mortgage, a loan is taken out by the business to acquire an asset. The financier will pay for the vehicle upfront but will list you as the owner and you pay regular repayments towards the total. The car acts as security for the loan and once the repayments have been made you are given clear ownership of the vehicle. Other options for when you reach the end of the repayments are to trade the car in or re-finance the car for the residual value.
What are the benefits of a Chattel mortgage?
There are a number of benefits of a Chattel mortgage. Some loans will offer greater variety in regards to loan lengths and payment options that can make the vehicle less expensive. A deposit can also be employed to reduce the size of the loan and because the car is used for business purposes payments may be tax deductable. Chattel mortgages also generally have lower interest rates as the mortgage is secured against the vehicle.
When are they used?
A Chattel mortgage is most commonly used as a way of businesses buying vehicles for employees if the vehicle will be used predominantly for work purposes. They are most suitable for companies that use a cash method of accounting as they will be able to claim the GST on the vehicle’s price up-front.
Individuals can also access Chattel mortgage as long as the car in question is used for work purposes over 50 per cent of the time.
Other car finance options
If a Chattel mortgage doesn’t sound like the right fit for you, there are a huge range of options out there, particularly if you are an individual.
Individual car loan
A personal car loan is a common option for people looking to finance their car. Starting at 4.50 per cent (as at January 2016), they can be an affordable way to get yourself on the road. Car loans typically offer fixed rates and there’s generally a limit to how long you can take to repay them. They’re also not known for their flexibility so if you decide you want to pay the loan off early, you may be faced with hefty break fees. Another key factor is whether you choose an unsecured loan or a secured loan (using the car as an asset) as this will almost certainly affect your rate. An unsecured loan will generally attract higher interest rates as the lender will be taking on more risk.
A personal loan is very similar to a car loan with a bit more flexibility. These rates can be variable or fixed, and you can use the money for other things in addition to a car. Starting at around 5% interest and often upwards of 10% for unsecured loans, they can be slightly pricey but you’ll find the costs are competitive if you select a secured loan.
A novated lease is an interesting option if your employer offers it. The car is paid for by the lender and leased out to you, but the repayments come out of your salary before tax so it can save you money here. Novated leases generally include a number of additional costs, such as servicing requirements, which can add up, so read the contract carefully and know what you are getting yourself in for as they are often fairly inflexible.
There’s no doubt dealer finance is hugely convenient, but be aware there are often hidden catches in some of these deals. January in particular is a popular time for dealerships to offer 0 per cent interest offers on car finance. While this type of deal might suit your finances, just remember there is no such thing as a free car. Ultimately the lender will want to make a profit, it’s just a matter of how. In relation to car finance, often 0 per cent deals include extra fees and charges. It also means the dealer might be less willing to negotiate on the price, or the value of a trade in, if you have one.