What is a goods loan (chattel mortgage) and how does it work?

If you're looking to buy a car or upgrade equipment for your business, a goods loan is a common type of loan used to finance car and equipment purchases.

 

What is a chattel mortgage?

A chattel mortgage is another term used to describe a car or equipment loan (we call it a goods loan). A goods loan (chattel mortgage) is a popular type of finance when buying a vehicle or equipment for business use. With a goods loan (chattel mortgage), you find the vehicle or equipment and a lender provides the goods loan (chattel mortgage) using the vehicle or equipment as security. Your business makes regular repayments, usually monthly, until the loan is paid off.

 

This means your business owns the vehicle or equipment from the start of the loan term and it’s used to secure the loan. A loan term is usually between 1 and 7 years. When it comes to tax time, your business can generally claim interest on loans and tax depreciation if the vehicle or equipment is used to produce income for your business.

How a goods loan (chattel mortgage) works

Much like a secured car or equipment loan, the lender will provide the funds to purchase the vehicle or equipment and you take ownership at the time of purchase. The lender uses the vehicle or equipment as security for the loan. Once the loan is paid out (including balloon payment), you own the asset outright.

Balloon payments – what are they?

What is a balloon payment?

With a goods loan (chattel mortgage), there’s usually an option to have a balloon payment. A balloon payment (sometimes referred to as a final repayment amount or residual amount) is a lump sum payable at the end of the loan term. Balloon payments are often used to help cash flow, as they can make your regular repayments lower.

Let’s look at an example

If the purchase price of the car or equipment is $50k and you choose a balloon payment of $10k, your regular repayments will be lower compared to having no balloon payment.

 

At the end of the loan term, you’ll pay the $10k balloon before the bank closes out the loan. It's important to know that even though the regular repayments are lower, the total interest amount will be higher with a balloon payment. Remember, this is just an example and balloon payment amounts vary depending on individual circumstances.

Benefits of a goods loan (chattel mortgage) option for a business

• Choice of a loan term that suits you – usually between 1 and 7 years
• A fixed interest rate so you have certainty of how much your instalments/repayments will cost
• You own and have use of the asset up front and we take security for the goods loan
• Choice of a balloon payment to make your regular repayments lower
• Potential tax deductions from interest component and tax depreciation costs on the vehicle or equipment
• Flexible repayment options mean you can structure repayments to suit the cash flow of your business, choose from monthly, quarterly, half yearly or annually.

 

While thinking about the benefits, it’s important to weigh up the benefits with any potential downsides that could impact you depending on your individual financial situation. This could include the asset being offered as security so it could be repossessed if you’re unable to make repayments. 

What to consider before applying for a goods loan (chattel mortgage)

As with all financing agreements, it’s important to measure how long you expect to use the equipment or vehicle in your business and consider any seasonal cash flow fluctuations.

 

Before applying, you may also want to think about:

• Your business trading history and experience. This helps give lenders confidence in the sustainability of your business performance.
• Income or capacity to repay a loan. When considering business loan eligibility, the lender is likely to expect evidence of how much money your business makes under recent and normal trading conditions. Be prepared to share your business and personal financial history. 
• When considering your capacity to repay a loan, conditions such as a repayment schedule, interest rates and loan terms are key considerations when calculating your loan. 

 

Get an online quote to estimate what your repayments could look like to assess it against your business income and cash flow. It’s also important to find out if there are any additional fees (including any monthly fees) and charges for setting up the finance during the term.

Lease vs hire purchase vs goods loan

A lease allows you to use the vehicle for an agreed period of time in return for regular payments. The lender buys the vehicle or equipment at your request and leases it to you for the agreed period. Once this period ends, you may be able to purchase the vehicle or equipment from the lender, or to return the vehicle to the lender. Your business can generally claim tax deductions relating to the lease payments if the asset is used to produce income.

 

A hire purchase is an agreement between your business and a lender to buy a vehicle or equipment over an agreed period of time. The lender buys the vehicle or equipment at your request and gives your business possession and use of it in return for regular payments. When the final payment is made (including any balloon payments), ownership of the vehicle or equipment is transferred to your business. Your business can generally claim interest component on payments and tax depreciation if the asset is used to produce income. It’s important to check with your tax accountant as this depends on your individual circumstances.

 

With a goods loan, you purchase the vehicle or equipment and take ownership at the time of purchase, and the lender will provide the funding for the purchase. The asset is taken as security for the loan. Once the contract is paid off including any balloon amounts, you own the vehicle or equipment outright. Your business can generally claim interest component and tax depreciation costs on the vehicle or equipment.

How to get a goods loan (chattel mortgage) with Westpac 

Get an online quote to find out what your repayments could be.