If you’re looking to finance a purchase, you might have come across chattel mortgages. But it can be confusing to understand how they work at first. So in this post, we’ll completely break down chattel mortgages, how they work, and why you should use them.
What Is A Chattel Mortgage?
A chattel mortgage, also known as a goods loan, is used by an individual or business to buy movable assets such as vehicles or equipment. The security for the lender in this loan is the movable asset you’ve purchased.
You pay regular payments, usually monthly, to the lender, and once all the costs, including the balloon payment, are cleared, you can have complete ownership of the purchased asset.
Until then, the lender has a specific ownership interest in the asset. And if the loan isn’t paid off, the lender may sell off your asset to recover their payment. For a more detailed explanation, you can read: ‘What is a chattel mortgage & how does it work’.
Types Of Chattel Mortgage
There are two main types of chattel mortgages:
1. For Equipment
As the name suggests, this type of loan is used to buy equipment, such as forklifts, tractors, and other business machinery. The borrower starts using the equipment immediately after the purchase. This helps the borrower pay off the debt with the money earned from using the equipment.
2. For Vehicles
This type of chattel mortgage finances vehicles, such as trucks, cars, and motorcycles. The purchased vehicle serves as the security for the loan, and the ownership remains with the borrower.
This type is common in countries with the Goods and Services Tax (GST), such as Australia. These countries let borrowers input tax credits for the GST paid on the purchase of the asset.
Chattel Mortgage Vs. Traditional Mortgage
A chattel mortgage is slightly different from a traditional loan. Here are some points to consider:
- The lender secures the loan using the purchased movable property or asset as collateral.
- The lender possesses a security interest in the asset until the loan is paid off.
- If the borrower fails to pay the loan, the lender can take hold of and sell the chattel to recover the amount.
- The borrower has chattel ownership during the loan payment time.
- It’s commonly used by small or large businesses to buy moveable assets.
- You secure the mortgage using real property such as land, home, or building.
- The lender gets a lien on the property until the borrower pays the loan.
- If the borrower doesn’t pay the mortgage, the lender can sell the secured property to recover the amount.
- The borrower has ownership of the property but gives a security interest to the lender.
- It is typically used for buying a home, vehicle, or property.
Benefits Of A Chattel Mortgage
If you are an Australian resident, you can enjoy the following benefits of a chattel mortgage:
1. Flexible Payment Structure
You can pay the loan in a span of two to five years, depending upon the agreement signed between you and the lender. Additionally, you can set up the balloon payment for the end of the term to reduce your monthly installments .
2. Low Interest
Compared to an unsecured loan, the interest rate on a chattel mortgage is lower because it’s secured by the asset itself.
3. Tax Credit Advantages
In some cases, you may be able to claim a tax credit as the mortgage finances the GST-inclusive price of the asset.
At the same time, remember that a chattel mortgage doesn’t fall under the National Consumer Credit Protection Act. So, it’s best to consult a financial expert before using one.
Chattel mortgages are suitable for those businesses or individuals who want to increase their working capacity and need a movable asset to do so.
This asset can be anything from off road 4×4 Utes, to specialised business equipment. The best part is that you won’t have to worry about high-interest fees or a tough repayment schedule.
We hope our article helped you understand the chattel mortgage better, so you can avail of this loan without any confusion. Good luck!