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 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.

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.

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.

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.

What is collateral?

Collateral, or security, is an asset you agree to surrender to a lender if you fail to repay a loan. Generally, the collateral for a car loan is the car itself. So if you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

Can I get a car loan with poor credit?

Poor credit doesn’t necessarily mean you won’t be able to get finance for your car purchase, though your options aren’t likely to be the same as someone with good credit.

In fact, a number of specialist lenders exist offering car finance for customers with poor credit, able to provide access to bad credit car loans.

However having a history of poor credit will likely mark you as a potential risk to lenders, so your car financing needs could see higher fees and interest rates. Alternatively, consider a secured car loan, which is a type of loan that uses the car you purchase as collateral, reducing the risk.

Other options include getting someone close to act as a guarantor for your car loan, or to talk to a broker about a personalised rate specific to your circumstances.

What is a loan-to-value ratio?

The loan-to-value ratio, or LVR, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have a loan-to-value ratio of 75 per cent. Loan-to-value ratios change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the loan-to-value ratio would now be 67 per cent.

What is vehicle finance?

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