Chattel mortgages explained

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’ll need to use your car primarily for work.  

Under a Chattel Mortgage, a loan is taken out by the business to acquire an asset, such as a car. The financier will pay for the vehicle upfront but will list you as the owner, and you’ll make 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 several benefits to a Chattel mortgage.  Some loans will offer greater variety in loan lengths and payment options, which can help to 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 deductible. Chattel mortgages also generally have lower interest rates, as the mortgage is secured against the vehicle.

When are they used?

Chattel mortgages are most commonly used by businesses to buy vehicles for employees to use 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 mortgages if 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 other options out there, particularly for individuals.

Individual car loan

A personal car loan is a common option for people looking to finance their car, and can be an affordable way to get yourself on the road.  Many car loans offer fixed interest rates and must be repaid over a fixed length of time. These types of loans aren’t 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.

Personal loan

A personal loan is very similar to a car loan with a bit more flexibility.  Their rates can be variable or fixed, and you can use the money for other things in addition to a car, such as car insurance, car accessories, and so on. They can be slightly pricey, but their costs tend to be more competitive if you select a secured loan.

Novated lease

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 you may save some money here. Novated leases generally include a few 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.

Dealer finance

There’s no doubt dealer finance is hugely convenient, but be aware there are often hidden catches in some of these deals.  January is a particularly 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.

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