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Chattel mortgages explained

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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Learn more about car loans

What is a secured car loan?

A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

What do I need to apply for a chattel mortgage?

Chattel mortgages are a form of secured car loan for businesses. The lender will set up a mortgage, while you take the car’s ownership. When the mortgage is paid off, you own the car. The borrowed amount is repaid through regular installments over a fixed period of time.

To qualify, you’ll have to meet the following chattel mortgage requirements:

  • The car should be used for business purposes at least 51 per cent of the time.
  • You must hold a valid Australian Business Number (ABN).
  • You must show you can service the loan on time
  • Identity proof
  • Financial records, such as profit and loss account and balance sheet
  • Details of the vehicle you want to buy
  • Bank statement for your business

What is a chattel mortgage?

A chattel mortgage is a mortgage on a movable item. In the case of a car loan, the chattel is the vehicle. The lender maintains a mortgage over the chattel/vehicle until the loan is fully repaid.

Where can I get a student car loan?

Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.

A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.

Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.

To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.

How do you get a car loan?

There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.

Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.

Can you get a chattel mortgage with bad credit?

Getting approval for a chattel mortgage with bad credit may be possible, given ‘chattel’ (usually a piece of equipment or car) is put up as security for the loan. That means if you fail to repay the loan, the creditor can recover the loaned amount by repossessing and selling the car or piece of equipment. This differs from unsecured car loans, where the asset is not tied to the loan and cannot be taken if you don’t meet the repayments. 

What is a car loan?

A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.

How to find a great car loan

Historically, finding a great car loan would require excess research ranging from visiting an excess of websites or making phone calls, but technology has moved on. Using RateCity, Australia’s leading financial comparison service, you can check out great deals from a range of lenders on the one site.

To start, select the amount you want to borrow and the length of the loan, narrowing your search to show just fixed or variable interest rate results.

Once you’ve indicated your search criteria, you’ll see an immediate list of lenders, ranked by interest rate or application fees. You’ll also be able to view the monthly repayment amount for each result, helping you to know what you can afford.

Up to six products can be compared side-by-side, complete with more information about each car loan, giving you more information about your options.

When comparing your car loan options, it’s ideal to keep in mind some points find a great car loan for your needs. Consider the following:

  • Choosing a low interest car loan can reduce costs
  • Selecting an option with low fees and charges is ideal, because these can really add up
  • Be aware of penalties, such as early exit penalties if you pay off the loan sooner than expected
  • Consider the features that best suit your situation

There are many ways to ensure that you get a great car loan. Ultimately, you’ll end up with the best deal by doing your research and selecting the most suitable product for you.

What is a guarantor car loan?

A guarantor car loan is a type of loan that features a guarantor on the agreement. The guarantor is a third-party individual, often a friend or relative, who guarantees the loan will be repaid if the borrower defaults on the car loan.

Guarantor car loans are often geared at people who might otherwise struggle being accepted for a secured car loan when purchasing a vehicle. Some of the reasons might include a lack of credit history such as with a student or young person, if there’s bad credit, or age as a factor such as with pensioners.

What is an unsecured car loan?

An unsecured car loan is a loan that is not connected to a form of security, or collateral. Not all lenders provide unsecured car loans – and if they do, they generally charge higher interest rates for their unsecured car loans than their secured car loans.

What is dealer finance?

Dealer finance is a car loan organised through a car dealer – as opposed to car loans organised by a finance broker or directly by the lender.

What is a guarantor on a car loan?

A guarantor on a car loan is a third party, usually a relative or friend, who guarantees to meet the repayments of a loan for the purchase of a car, if the borrower/owner of the car defaults on the loan.

Guarantor car loans can be useful for people who would otherwise struggle in being accepted for credit to purchase a vehicle. These may include people with bad credit, students and young people who may have no credit history, as well as some pensioners.

Many lenders offer guarantor car loans, guarantor personal loans and guarantor home loans, because of the significantly reduced risk to the lender.

How to get a chattel mortgage?

Both businesses and individuals may use a chattel mortgage, provided that the car is being used predominantly for business purposes. 

To apply for a chattel mortgage, you need to first consider your options and choose a suitable lender that meets your requirements. Once you have selected a lender, you can apply for the loan online by filling out a form. If the lender doesn’t offer an online application process, you can either call them or visit their nearest branch. 

After you’ve applied, the lender will ask you to supply documents that confirm your identification, income, job profile, etc. If everything is in order, most lenders will arrange the loan’s settlement, so all you need to do is pick up your car!

Can an individual apply for a chattel mortgage?

Lenders offer chattel mortgages as a way to finance vehicles used for business purposes. Companies, as well as individuals, are eligible to apply for and receive chattel mortgages. The essential eligibility requirement is that the vehicle is used for business at least 51 per cent of the time. If you’re a tradesman and require a new utility vehicle to move equipment, you can apply for a chattel mortgage to finance the purchase.

A chattel mortgage for individuals is an option if you’re self-employed and have an Australian Business Number (ABN). You’ll also need to be registered for the Goods and Services Tax (GST) and have a clear credit history. Like all other loan types, you’ll have to prove your capability to service the loan to qualify for a chattel mortgage.

You’ll retain the ownership while the lender holds the vehicle as security for the loan in a similar way as they would a property with a home loan. You repay the borrowed amount in predetermined monthly instalments. Once you repay the entire loan amount, the lender will remove the mortgage.