If you’re in need of a fleet of cars for daily operations or heavy equipment like bulldozers and forklifts for everyday business tasks but can’t meet their high upfront costs, there’s a solution for you: a chattel mortgage.
A chattel mortgage is a high-liquidity loan that helps you get the vehicles you need, but under your lender’s name — until you pay them off, of course. It comes with tax breaks, deductible interest payments, and almost zero risk of long-term debt.
Sounds good? Let’s talk more about chattel mortgages and how you can get one.
What is a chattel mortgage?
A chattel mortgage is a type of loan used to purchase a movable property (the “chattel”), like a car, marine vessel, or aircraft, that’s used as collateral. It’s made specifically for commercial car purchases and businesses needing a vehicle for at least 50% of their operations.
These loans are secured with the chattel used to get the loan, which means lenders are likely to approve these loans even when businesses don’t have extensive credit histories or long track records.
Plus, chattel loans tend to have shorter repayment terms (one to five years) than regular mortgages, so you pay less interest and get your vehicle’s title quickly.
You can learn more about this type of loan here.
How does it work?
Here’s how a chattel mortgage works:
- You apply for a chattel loan after choosing a vehicle.
- Your lender gives you the money to buy the car.
- Once the loan goes through, you can possess and use the vehicle immediately. However, your vendor keeps the vehicle’s title and ownership.
- You make monthly payments on your loan as needed.
- Once the loan is repaid in full, you get the title of the vehicle. But if you default on the loan repayments, your lender can take back the car and sell it to recoup their losses.
Pros of getting a chattel mortgage
If you’re a small- to medium-sized business (SMB) with a tight cash flow and need cars or heavy business equipment for business purposes, a chattel mortgage is what you’re looking for. Here’s why:
1. Increased Cash Flow
A chattel mortgage usually comes with lower interest rates because it’s secured against the vehicle. This frees up cash and enables you to spend more on investments.
Plus, using a chattel loan, you can purchase expensive equipment that might be out of reach if you had to pay for it in cash, such as bulldozers and forklifts.
2. Tax breaks
As your vehicle is used for business purposes, the payments you make on it are tax deductible. You also won’t be charged GST on the contract balloon amount or the monthly repayments.
Plus, you can claim tax deductions on vehicle depreciation, running costs, and interest payments.
3. Flexible loan terms and repayment options
A chattel mortgage enables you to pay lower monthly repayments over your term, making it easier to budget your costs effectively. But you can only do this by agreeing to pay a balloon payment at the end of the term.
For instance, if you have limited cash flow but are expecting to make more revenue in the coming year(s), you can go for a higher end-of-contract balloon and lower monthly repayments.
You can also get flexible loan terms on chattel mortgages, meaning you can repay the mortgage in one to five years. This helps you tailor your mortgage to your cash flow.
4. Lower eligibility requirements
You can qualify for a chattel mortgage even if you don’t have an extensive credit history or a score higher than 620, which is the minimum for getting a regular mortgage. In fact, most chattel mortgage lenders usually require a credit score of 575.
Cons of getting a chattel mortgage
While chattel mortgages are an excellent alternative to regular loans, they do have some cons, such as:
1. High-interest rates
Chattel mortgages come with higher interest rates and APR than regular mortgages. For instance, if you take out a regular mortgage, you might pay 2 to 4% interest.
In contrast, a chattel mortgage might come with 4 to 6% interest. Keep in mind that although this seems extremely high, you’ll actually pay less interest because your contract or repayment terms will be short.
2. Risk of repossession
Unlike a regular loan, your lender has the rights to your vehicle when you go for a chattel mortgage. This means if you default on your repayments, they can easily take away your car, and you won’t have any legal recourse.
Fortunately, chattel mortgages come with flexible payment options, making it easy to get repayment breaks if needed.
3. Fewer borrowing options
Not many lenders offer chattel loans, so you might have fewer borrowing options if you’re going with them.
How to get a chattel loan
While getting a chattel mortgage is easier than an unsecured loan or regular mortgage, easy doesn’t do as easy says. You have to put in some brain power to understand whether these mortgages are for you.
Here’s what to do:
1. Do your homework
Before hopping on the mortgage vehicle, learn the ins and outs of what you’re getting into. This means researching and comparing at least five chattel mortgage providers, looking at offerings, interest rates and contract terms as well as checking vehicle history.
2. Determine whether you can make repayments and handle the debt
Once you’ve narrowed your options to the top three, calculate exactly how much it would cost to repay the mortgage before settling on a lender.
You should also take a look at your cash flow history at this point. Ask yourself: can you afford the mortgage? You can determine the answer by looking at forecasted revenue for the next four quarters.
3. Check before you buy
As everybody says, the devil’s in the details. So, once you’ve chosen your chattel lender and decided on your vehicle, conduct a vehicle history check. That goes double if you’re buying a used car in the UK.
You could use the Auto Experts’ vehicle history check to determine whether the car you’re purchasing has been refurbished. You’ll get access to the following:
- MOT/mileage history
- Outstanding finances check
- Write-off history
- Tax rates check
- Fuel consumption
- VIN check
- Plate/colour/ownership changes check
- Previous keeper count.
Remember: it’s always better to be safe than sorry.
