A chattel mortgage is an extremely popular way for business owners and operators to finance a vehicle or equipment. Similar in structure to a fixed-rate mortgage, a chattel mortgage gives the finance provider a chance to use the vehicle as security for the loan. Mortgage refers to the loan and chattel refers to the equipment or vehicle.
A chattel mortgage provides you ownership of the vehicle or equipment immediately, which differs from a lease structure. Then, the income that the asset generates for your company is used to pay off the loan. In the event that you fail to make your monthly repayments, your lender will likely be able to repossesses the asset(s).
A chattel mortgage is a loan that a lender might offer you to purchase a vehicle. The lender uses the vehicle as a sort of security against the loan, even though the equipment or vehicle is owned by the company. That arrangement provides the lender with peace of mind that you will repay the loan. It is similar to a fixed-rate mortgage or home loan.
Chattel mortgages differ from loans like financial leases or hire purchases in multiple ways. For instance, a hire purchase is when you rent equipment or a car from a lender and pay regular instalments. Financial leases are when a financier owns the equipment or vehicle, and the borrower has the chance to purchase it for an additional price. Chattel mortgages, however, mean that when the loan is repaid, the borrower owns the equipment or vehicle outright.
Balloon payments are large, one-off payments that you can pay at the end of the chattel mortgage term. The term balloon payment comes from the inflated size of the payment versus the previous payments throughout the loan term.
A major benefit to this arrangement is that you can mitigate your monthly repayments if you pay a higher balloon payment, which can benefit your company’s cashflow for day-to-day expenditures. Prior to signing on to a balloon payment, however, it is best to ensure it is manageable and will not negatively affect your company’s financial situation.
Some of the benefits of a chattel mortgage include:
- Generally, interest rates are lower than an unsecured loan like a consumer car loan;
- A chattel mortgage can give you ownership from the beginning, so that it shows up as an asset for your company as well as a loan or liability, which differs from finance leases or hire purchases;
- Chattel mortgages offer tax benefits. You are entitled to claim an input tax benefit upfront as well as interest and depreciation costs, depending on the amount you use your equipment or vehicle;
- Repayments can be fixed and structured to suit the cashflow of your company;
- You can decide to set a balloon payment near the end of the term, providing your company with the ability to decide if you want to keep your monthly repayments down; and
- Repayments can be structured over terms typically between two and five years.
Chattel mortgages can also have some pitfalls. Your business will only possess full ownership of the vehicle or equipment when the mortgage term comes to an end, and you are responsible for the maintenance of the vehicle as well as all of the operating costs.
What is the difference between a chattel mortgage and a lease?
The difference between a chattel mortgage and a lease Is that a chattel mortgage is a commercial loan product that works in a similar way to a traditional, fixed-rate mortgage. Essentially, you acquire ownership of the vehicle immediately, with the lender using your vehicle or equipment as security against the loan. A lease, on the other hand, is a long-term rental agreement, wherein you typically do not end up having ownership of the vehicle or equipment.
If you are trying to decide between a chattel mortgage and a lease, it is best to take the following into account: your financial situation; the type of asset you are looking to purchase; tax benefits available; if you require ownership of the asset, and the type of business you are operating.
