What is a chattel mortgage for business finance?
A chattel mortgage is a specialist car finance option for business use. Learn more about how chattel mortgages work, and what benefits they could offer your business.
Are you a sole trader or business owner? Do you travel for work and need to buy a car for commercial purposes? Do your employees travel for business and need transport? If you’re looking to finance a car for business purposes, a chattel mortgage could be the right car loan for you.
What is a chattel mortgage?
A chattel mortgage is a loan product built for business owners. It covers the cost of commercial equipment or vehicles that are used for business at least 50 per cent of the time. This loan product suits sole traders, companies and trustees.
In the case of car loans, the chattel mortgage can cover 100 per cent of the car cost or more, but this depends on each lender’s terms.
What does chattel mortgage mean?
A ‘chattel’ is defined as a piece of personal property that can be moved, such as a car. ‘Mortgage’ is defined as the financial agreement that allows you to borrow money from a lender to buy an asset. The lender takes title of the asset until you repay the debt. Chattel mortgages are only available to companies that prove the chattel is for business use, and must report this to the Australian Taxation Office (ATO).
Chattel Mortgages vs. Consumer Car Loans
If you’re a sole trader or business owner considering a chattel mortgage, it’s important that you understand that you will not be protected by the National Consumer Credit Protection Act (NCCP).
The National Consumer Credit Protection Act regulates licenced credit providers, to ensure that stringent credit checks are completed, and that information on fees and charges is provided upfront. As a chattel mortgage is created for business and has numerous tax advantages, it is not covered by these regulations.
Choosing the right chattel mortgage for you
Comparing business car loans based on interest rates, fees and benefits can help you find the best chattel mortgage for your business. As with every loan product, it is crucial to compare your options before you sign anything. Loans can vary between lenders, so make sure you look at key features, to see which chattel mortgage is best for you.
Fixed vs variable chattel mortgages
Firstly, you must decide on the type of loan and interest rate that you would like to be charged over the term of your car loan.
Fixed interest rate: A chattel mortgage with a fixed interest rate locks the borrower into a set interest rate for the entire loan. This means that the interest rate will not change. This can help you manage your business budget with stable monthly repayments. However, if your lender cuts their rates, the rate on your loan will stay the same.
Variable interest rate: Chattel mortgages with variable rates can change at any time. If your lender decides to increase their interest rates, your repayments will increase, which could be costly. If they cut them, however, your repayments will fall. If you decide on a variable rate chattel mortgage, be sure to budget for a higher interest rate. This way, you won't be out of pocket if the rates rise unexpectedly.
Is a chattel mortgage a secured loan?
A chattel mortgage and a secured car loan are similar, but they also have key differences. Before deciding if a secured car loan or a chattel mortgage is right for you, it's a good idea to compare their features.
Similarities between secured car loans and chattel mortgages
Collateral: Secured car loans and chattel mortgages use the asset purchased as collateral on the loan, to reduce the risk to the lender. If you do not make repayments, the lender can recoup their losses by selling the car.
Reduced Risk: If you default on your repayments for a secured car loan or chattel mortgage, the lender can repossess your vehicle and sell it to recover their losses. As both secured car loans and chattel mortgages have collateral as security on the loan, they are seen as lower financial risk.
Lower interest rates: Reduced risk can sometimes mean lower interest rates on the car loan amount. Both secured car loans and chattel mortgages will most likely offer lower interest rates than unsecured loans.
Differences between secured car loans and chattel mortgages
Purpose: The main difference between a secured car loan and a chattel mortgage is its purpose. With a chattel mortgage, you must prove you are primarily using the car for commercial purposes. A secured car loan is primarily for consumers, and if used for business purposes, it will not provide the tax benefits that a chattel mortgage does.
Tax benefits: Chattel mortgages allow you to claim various tax deductions not available to consumers, including an input credit on your Business Activity Statement (BAS) for the goods and services tax (GST) on the vehicle's price. You may also be eligible for the $30,000 instant asset write off.
Loan term: Chattel mortgages can often have more flexible loan terms. The loan term for chattel mortgages can be between one and seven years. Secured car loans usually last between two and five years.
Do you own the car outright with a chattel mortgage?
When you buy a vehicle or vehicles for your business using a chattel mortgage, your lender will take out a loan over the chattel to secure it. The lender will then register the mortgage the car with the Personal Property Securities Register (PPSR - previously REVS).
Similar to a secured car loan, you will have immediate ownership over the vehicle, but the title will not be in your company name until you have repaid your debt. If you fail to meet your repayments or you cannot pay the loan back within the agreed loan term, your lender can repossess the car to cover their losses. Once you have repaid the loan amount in full, the lender will contact the PPSR to transfer the title into your name.
After you have paid the loan amount and the interest, and the title is in your name, you will then own the car outright. If you do not want to own the car outright by transferring the title of the car to your business, you can opt to trade-in your car at the end of the loan term.
Chattel Mortgage Trade-ins
A chattel mortgage can also offer opportunities for trade-ins that could help you reduce the cost of the vehicle.
Initial deposit: When you take out a chattel mortgage, you can trade-in your current vehicle to use it as your deposit, if you do not have the money for a cash deposit. You can also opt to trade in your vehicle at the end of your loan term, if there is an outstanding amount. You will have an outstanding amount on your loan at the end of the term if you have opted for an interest-only repayment option or if you have organised for a balloon payment on your chattel mortgage.
Interest-only and balloon payments: Some lenders will offer interest-only repayments, or allow you to set what is known as a balloon payment on your chattel mortgage. Both methods will mean that you have an outstanding amount on your loan when the term ends. This remaining debt can either be repaid with cash, or by trading in your vehicle.
If you want to upgrade the vehicle at the end of the loan term on a chattel mortgage with interest-only repayments or a balloon payment, the trade-in can cover the residual value. This can help you to apply for a new loan, without any outstanding debt. Alternatively, if you pay the full loan amount and the interest, you can trade-in the vehicle and use its value to cover your initial deposit on a new chattel mortgage.
Are chattel mortgage payments tax deductible?
Chattel mortgages can have various tax benefits for business owners, both upfront and throughout the loan term. As a chattel mortgages are used for business, you need to keep a logbook for the ATO, to prove you are using the car is being used for business purposes at least 50 per cent of the time.
Reporting business use to the ATO
If you’re a business owner or are self employed and have an Australian Business Number (ABN) , you’ll already be aware of the importance of reporting and tracking your expenses. What you may not be aware of is that you can claim both the interest paid on a chattel mortgage as an expense and the GST on the vehicle.
Claiming the GST on your vehicle’s price
If you are registered for the Goods and Services Tax (GST), you can have an input credit on your next Business Activity Statement (BAS) by claiming the GST included in the cost of the chattel. This can be done as soon as your chattel mortgage begins, which can be beneficial for business owners.
How to claim the interest charged on your chattel mortgage
Just as you would claim fuel, repairs and maintenance as business expenses in your tax return, the interest paid on a chattel mortgage can be claimed as a tax deductible expense.
Monitoring your expenses can be difficult, especially if you’re not a whiz with spreadsheets, numbers and the like. Luckily, the ATO has created a handy car expenses fact sheet and a smartphone app that allows you to track your expenses via ‘myDeductions’.
When it comes to the end of the financial year, calculate the total interest you have paid, and upload this either into the ATO app or add this directly into your tax return as a deductible expense. You can claim 100 per cent of the interest you pay on the mortgage.
Using the ATO App to track your trips
The ATO requires a logbook of at least 12 weeks to prove that you are using the car for business purposes more than 50% of the time. If you do not prove this, you will not be able to reap the tax benefits a chattel mortgage can bring.
To track your trips in the app, click ‘Add Trip’, enter your vehicle details, make sure you select ‘Someone else owns or leases’ in the ownership section, then add in your trips as you make them.
The app even has the option to add a GPS trip, so you can click start every time you drive for business purposes, making it simple when it comes to tax time.
How to claim the $30,000 instant asset write off
The $30,000 Instant Asset Write-Off provides small businesses with an asset write-off of up to $30,000 for assets costing less than the instant asset write-off threshold which are purchased and used in the year that the write-off is claimed:
- $30,000 from 7.30pm AEDT on 2 April 2019
- $25,000 from 29 January 2019 until before 7.30pm AEDT on 2 April 2019
- $20,000 before 29 January 2019
Whether the threshold is GST exclusive or inclusive will depend on your GST status, however be sure that the entire cost of the asset is less than the instant asset write-off threshold, irrespective of any trade-in amount.
In working out the amount you can claim, you must deduct your personal usage. The ATO explains the threshold clearly in the following example, yet they do have more examples on their website if you need a little more information on how it all works.
ATO EXAMPLE: Immediate write-off
On 18 May 2018 Fiona buys a new powerful computer for $6,800 that she uses 80% of the time for business purposes and 20% of the time for personal purposes. She also bought a new printer for $700 which she uses 100% of the time for business purposes. For the computer, Fiona calculates her instant asset write-off as 80% (the business use proportion) of $6,800, so she claims $5,440. For the printer, she claims the entire cost of $700.
Fiona includes the combined amount of $6,140 at label A of the Business and professional items schedule which is filled out when completing her tax return.
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Business Finance Writer
Rachel Wastell is an award-winning writer with a knack for translating complicated subjects. She is a strong environmental advocate, and is as passionate about the planet as she is about finance and open education. Writing professionally for almost ten years, Rachel's work has been published across the Australian media landscape including the Australian Financial Review and The Guardian, and she regularly contributes to Business Insider and Lifehacker.
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Frequently asked questions
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.
What is CTP insurance?
CTP insurance, also known as compulsory third-party insurance or a green slip, is compulsory if you want to register a vehicle in Australia. If you’re responsible for a car accident, your CTP insurance will be used to pay any compensation due to anyone who might be injured or killed. However, CTP insurance doesn’t cover you for vehicle damage or theft.
What is a dealership?
A dealership is a car yard or a place where cars are sold.
What is proof of income?
Before giving you a car loan, lenders will ask for proof of income – documentary evidence that you earn as much as you claim you earn. Lenders will typically want some combination of tax returns, pay slips and bank statements. The reason lenders want proof of income is because they want to be sure you have the means to repay the car loan.
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 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 loan term?
The loan term is the amount of time the lender gives you to repay the car loan. For example, if you take out a $20,000 car loan with a five-year loan term, you would be expected to pay off the entire $20,000 (plus interest) within five years.
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 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 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.
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 discounted student car loan?
Being a student is tough enough, and while you might find the odd student discount on movies and technology, the same can’t be said about car loans, as you can’t really get a discounted student car loan.
Lenders make money on the interest and fees that they charge with loans, and the lowest interest and fees are given to the most reliable credit holders: people with excellent credit history.
As a student, you are unlikely to have enough on your credit report to warrant an excellent history. There are however, ways of getting a lower interest car loan if you can’t get an interest-free loan from the bank of mum and dad. One way of doing this may be through getting a guarantor car loan, which can get you a secured car loan by setting your parents up as guarantors.
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.
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 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 an LVR?
The LVR, or loan-to-value ratio, 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 an LVR of 75 per cent. LVRs 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 LVR would now be 67 per cent.
Can you put a deposit on a car to hold it?
It’s up to individual car dealers to decide whether to promise to hold on to cars in exchange for deposits.
Some car dealers will request a deposit and promise, in return, to hold on to the car for a certain period of time. Others will request a deposit but make no guarantees, other than to return the deposit if they end up selling the car to someone else.
Some car dealers ask for deposits; others don’t. If you get asked for a deposit and you decide to pay it, make sure the dealer gives you signed paperwork before you make the payment and a receipt after you’ve made the payment.