When it comes to car and equipment finance, a chattel mortgage is a popular option among business owners and operators. You may like to call it vehicle or an equipment loan.
A chattel mortgage is structured similar to a fixed-rate traditional home loan mortgage
Finance Companies utilise the car or other assets such as equipment as the security for your loan. Chattel refers to the car or equipment, and mortgage refers to the loan.
Unlike Hire Purchase or a Finance Lease, an Equipment Loan gives you ownership right away and you then pay off the loan from the income the asset generates in your business.
If you are unable to meet your contractual repayments, your finance provider may be able to repossess your car or equipment.
Structured Repayments over a range of terms – typically 24 months to 60 months
Fixed or variable interest rates that typically lower than unsecured finance
Repayments can either be fixed for the same amount each month for certainty of amount or can be tailored to fit your cash flow requirements
You own the financed asset from day one, thus it is listed as an asset on your business balance sheet along with the finance component listed as a liability
A balloon or residual repayment can be placed as last one off payment at the loan terms end to reduce your monthly payments
What’s a balloon payment?
A balloon payment or residual amount is an amount that is not repaid until the end of your finance agreement. The higher the balloon payment, the lower your monthly repayments.
Remembering that higher balloon payments will increase the amount of interest you pay over the loan term as you will not be paying down the principal portion of the loan as quickly.
Balloon payment or residual amounts are beneficial if you would like to keep the monthly repayments lower for cash-flow purposes.
It is important to ensure any balloon payment or residual amount is manageable at the end of the loan term in if you want to simply sell the asset and pay off the finance.
Are there any Tax implications
With a chattel mortgage, the goods and services tax (GST) inclusive purchase price of the car or equipment is financed and you’re entitled to claim an input tax credit up-front.
You may also be able to claim interest and depreciation costs, depending on how much you use your car or equipment for business use.
It is a good idea to seek advice from your accountant regarding your circumstances and tax impacts.
Ready to find out more?
Contact Western Financial Group today to ensure you get it right – the first time!