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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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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.
If you own a car, it may be something that can help you bring down the cost of your next vehicle purchase through its sale. However, before you can do that you’ll want to find out how much your car is worth.
Your car’s worth can depend upon various aspects, including:
- Model and make
A great starting place for aspects of this includes websites that offer online valuations, allowing you to enter your car’s make, model, year, badge and description, with the listed results displaying a price guide based on both selling your car privately and through a dealership.
Both have pros and cons, as cars can be very profitable, something that will no doubt impact any chance you have to make the most of your car’s value upon sale. Dealerships will try to profit on your trade-in by buying it for less than they can sell it for, so you shouldn’t expect the same price selling a car to a dealer that you would necessarily get selling a car privately.
You don’t need good credit to get a car loan, although the worse your credit history, the harder and more expensive it’s likely to be.
Some lenders will do business only with borrowers who have good credit. However, there are other lenders that are willing to offer car loans to borrowers who don’t have good credit. The catch, though, is that they may charge higher interest rates and fees, and also require more paperwork.
If you don’t have good credit and want a car loan immediately, you can search for lenders that work with bad credit borrowers. If you are able to wait, you can work to improve your credit score and then apply for a car loan once you have good credit.
Finance brokers help borrowers organise car loans with lenders – that is, they act as middlemen between borrowers and lenders. While lenders will only recommend their own products, finance brokers recommend products from a range of lenders. Finance brokers need to be accredited with a lender to do business with that lender; a typical broker will be accredited with between 10 and 30 lenders. Finance brokers generally don’t charge consumers; instead, they receive commission payments from lenders.
If you already own a car, you could potentially bring down the cost by selling your car in the process. Before that happens, though, you’ll need to find out how much your car is worth.
One of the first places to find this value is to research the value of your current car, giving you an idea of roughly how much it’s worth in its peak condition.
There are plenty of websites that offer a free online valuation, allowing you to enter your car’s make, model, year, badge and description, with results listing a price guide based on both selling your car privately and through a dealership.
Of course, dealerships will try to profit on your trade-in by buying it for less than they can sell it, making it highly unlikely that you’ll get the same price selling a car to a dealer as you would selling a car privately.
However, private car sales can be costly and can take months to sell, making car trading more convenient with a guaranteed return, even if you may not be able to realise the total value of your car’s worth.
Remember that everything is negotiable. If the dealership is offering you less for your trade than you wanted, try to negotiate elsewhere to gain that money back. Start by negotiating on the price of the trade and then ask them if they can give you a further discount on your new car.
There’s no set number. That’s because borrowing capacity differs from person to person, as well as lender to lender.
Lenders don’t give out car loans unless they’re confident they’ll be repaid. Each person is different, so the amount of money one person can successfully borrow will differ from another person’s number. Also, each lender uses its own formulas to calculate borrowing capacity – so Mr & Mrs Smith might find that while Lender X will give them a car loan for $20,000, Lender Y will offer only $18,000.
Yes, some banks will be willing to provide guarantor loans, including Commonwealth Bank, NAB, Westpac and ANZ, though the terms for signing up to a banker-issued guarantor car loan may not necessarily be as good as another lender.
You should keep in mind though that these larger banks, because of their monopoly of the market, tend to have higher interest rates than the smaller lenders.
In comparison, smaller loan companies and credit unions tend to be more competitive in their battle for your business. There are plenty of lenders willing to lend to people with bad credit or no credit history who have willing guarantors.
Yes, you can get a car loan with bad credit, although you’ll probably find the process trickier and dearer than that experienced by people who have good credit histories.
You can find a number of lenders that specialise in bad credit car loans. However, make sure you compare bad credit car loans before you sign on the dotted line, because not all car loans are alike and having bad credit may mean you are more likely to be hit with higher fees and interest rates.
If you have bad credit, it’s important not to take out a car loan unless you can afford the repayments because a default could further damage your credit rating. Conversely, if you make all the repayments and repay the loan successfully, your credit rating might improve.
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.