Chattel Mortgage Definition & Example

What is a Chattel Mortgage?

A chattel mortgage is a commercial car loan product wherein a finance company lends a customer to purchase a car (chattel) or other vehicles that will be used for business 50% of the time or more. Businesses and individuals are eligible to avail a chattel mortgage as long as the car is used predominantly for business purposes.

Features of a Chattel Mortgage

1. The customer will be the owner of the car after purchase and can include it as an asset on its balance sheet.

2. The customer can choose to buy the vehicle solely through chattel mortgage (this means businesses can make other use of their capital reserves) or to put a deposit to reduce the size of the loan.

3. The customer has a loan term option ranging from 12 months to as long as 84 months (7 years).

4. The customer can choose whether to place a balloon payment at the end of the term. The residual value payment (balloon payment) is a lump sum for payment, which will lower the regular payments for the loan duration. The balloon value can vary depending on the type and age of the chattel. The customer also has an option to re-finance this residual value.

5. Being a security-backed loan, chattel mortgage has lower interest rate.

6. GST credit, fuel input tax credit, deprecation on the car, running costs and interest on the repayments are reclaimable for customers.

How Does a Chattel Mortgage Work?

The customer will take ownership of the car upon purchase and will make regular repayments to the finance company on a monthly, weekly or otherwise arranged basis. The lender places a mortgage on the chattel by way of a PPSR-registered Fixed and Floating Charge to provide security for the loan. At the end of the loan term, the finance company will remove the Charge upon payment of the residual value, giving the customer clear title to the chattel.

Step by step example of a Chattel Mortgage

1. Company ABC submits a filled-out Loan Application Form to Lender XYC (lender should be registered with Australian Securities and Investments Commission) to purchase a delivery van, including all requirements like sources of income, car brand and model, car dealer information, price quotation and mode and terms of payment.

2. Lender XYC conducts background investigation, coordinates with the car dealer, processes loan application, then releases funds to Company ABC.

3. Company ABC purchases the delivery van, processes the necessary papers and takes ownership of the vehicle.

4. Company ABC signs chattel mortgage contract and sends to Lender XYC.

5. Lender XYC executes chattel mortgage over the delivery van as a security for the loan by registering the vehicle to the Personal Property Securities Register (PPSR).

6. Company ABC makes repayments to Lender XYC through the mode of payment agreed, including the residual value at the end of the term.

7. Once payment and contract is completed, Lender XYC removes security interest on the delivery van with PPSR, giving the customer clear title to the vehicle.

Chattel mortgage is one of the popular solutions in buying a vehicle, especially for businesses.  Still, there are plenty of choices an individual can go to like unsecured personal loan, home equity loan, bank loan, dealer finance and through auto loan brokers. For the best advice regarding your financing options, come talk to us at Total Funding and we’ll be happy to answer your questions.