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The advantages and disadvantages of a chattel mortgage

Jodie Humphries avatar
Jodie Humphries
- 6 min read
The advantages and disadvantages of a chattel mortgage

In car loans, one size fits all is rarely true. This is why multiple options are available for you to finance a car purchase, each with distinct pros and cons. These differences make it important to take some time to research the different options. 

Before researching car finance, one key thing to know is whether you’ll use the car for business purposes. If you plan to use the vehicle for business more than 50 per cent of the time, you may consider looking into a chattel mortgage.

What is a chattel mortgage, and how it works?

A chattel mortgage is similar to a secured car loan but only available if the vehicle is used for business purposes at least 50 per cent of the time. With a chattel mortgage, the lender will give you the money needed to purchase a vehicle, also known as the “chattel” - a piece of movable property. This chattel will also be used to secure the loan. This means you retain the ownership of the vehicle, but you may lose the vehicle if you default on repayments. After repaying the mortgage, you will have complete ownership of the car. You can also refinance the residual car value or trade in the vehicle at the end of the chattel mortgage period.

Benefits of chattel mortgage

Chattel mortgages are business transactions. You may be able to claim depreciation and enjoy other benefits available to business owners. These include:

  • Lower interest rates than some consumer car loans since there are fewer account-keeping fees and other charges. Additionally, the interest rates are generally lower than unsecured loans since the loan is secured by the value of the chattel.

  • Getting ownership of the car at the time of purchase allows you to claim the GST paid on the car price in your next Business Activity Statement (BAS). This is only applicable if you’re registered for GST on a cash accounting basis.

  • Other business benefits like depreciation and interest paid can also be claimed in your BAS. This is because it’s considered a business asset. Additionally, chattel mortgage GST is not chargeable in your monthly repayments. It’s only applicable on the initial purchase price.

  • Flexible repayment terms customised based on your needs and the cash flow projections of your business over 12 to 60 months. You can opt for regular repayments or choose a balloon repayment at a pre-determined time. The balloon payment can often be between zero per cent and 60 per cent of the car’s residual value and varies from one lender to another.

  • Lenders provide 100 per cent of the purchase price along with maintenance, insurance, and other add-ons. Therefore there is no obligation for any initial payment from your own cash or funds to ensure your business's cash flow is not impacted.

Are there any disadvantages of a chattel mortgage?

Along with the potential benefits or advantages of a chattel mortgage, there is also a potentially significant disadvantage. These mortgages are not regulated by the National Consumer Credit Protection Act (NCCPA). Without this protection or regulation, lenders who offer chattel mortgages aren’t required to do the checks licensed credit providers are as per the regulatory guidelines. This could mean people overextend themselves financially unless they’re honest about their finances and therefore are more likely to default, impacting the business’s credit. Borrowers are also not protected if they want to challenge confusing or unclear conditions of the chattel mortgage.

It’s also worth remembering that a chattel mortgage is similar to a secured car loan, which means your car is offered as security for the mortgage. If you’re unable to make timely repayments, the lender might repossess the vehicle. Therefore, it’s important to plan your budget carefully to make sure you can afford to make the repayments and pay for your car. Don’t forget that as part of owning a car, you’ll need to make loan repayments and pay for other costs, including the maintenance of the vehicle. It’s important to include these costs in your calculation.

What happens when the chattel mortgage period ends?

Once you make all the repayments, including any balloon payment you may have organised, you own the vehicle. The lender will remove the mortgage that is listed on the vehicle on the Personal Property Securities Register (PPSR), giving you complete ownership, free and clear. After this, you can use the car either for business or personal purposes. You can also sell the car, lease it for additional income, or trade it in for another vehicle.

Consumer loan vs. chattel mortgage

If you’re trying to decide between a consumer loan and a chattel mortgage, there are some similarities and differences you should consider. Before deciding, you should consider that consumer car loans often have higher fees and charges than chattel mortgages. Therefore, the overall cost of a chattel mortgage could be lower when compared to consumer loans. However, interest rates and fees on both consumer car loans and chattel mortgages differ between lenders. It’s worth comparing different options before deciding on one that best meets your requirements.   

Another difference between chattel mortgages and consumer car loans is that you can use a chattel mortgage only when purchasing a car used for business purposes at least 50 per cent of the time. On the other hand, a consumer car loan has no such restriction. You can use the car for business and personal use without any concern you may be using it too much for personal use. 

It’s also possible to get an unsecured consumer car loan that doesn’t require you to use your car as security for the loan. However, unlike a chattel mortgage, you cannot claim GST, interest paid on the borrowed amount, and depreciation when you use a consumer car loan to buy a car for business use. 

Chattel mortgage lenders are also known to offer greater flexibility in repayment terms to suit borrowers’ needs than lenders that offer consumer car loans. Overall, both options have different pros and cons. The right option for you will depend on your personal preferences and financial requirements.

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Product database updated 21 May, 2024

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.