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Consumer Car Loan vs. Chattel Mortgage
●February 11, 2021●6 minute read
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When looking to finance a car purchase, it is important to understand your options. If you will be using the vehicle for business purposes, two options you may wish to consider are a consumer car loan or a chattel mortgage. When choosing between these two options, it’s important to consider the differences and advantages of each as well as your personal circumstances.
What is a consumer car loan?
A consumer car loan is a personal finance option applied for when an owner uses the car for less than 50% business use. Consumer car loans are typically used for cars that are intended more so for personal use. A lender will approve you for your specified amount and, depending on how much you borrow, your repayment terms will vary.
What is a chattel mortgage?
A chattel mortgage can be used to purchase an asset for business use. A chattel mortgage can only be taken out if the asset is used primarily for business purposes; this means it must be used for more than 50% business purposes. Similarly to a regular mortgage, the lender provides funds to purchase the asset and registers their security interest on the Personal Property Securities Register (PPSR) for the duration of the loan period. This means that you must have an asset to offer as security on the loan. Often, you’ll be able to secure your loan with the car you’re purchasing. Lenders often ask for security on loans because the amount being borrowed is a large sum, and there is, therefore, more ‘risk’ involved if the borrower is unable to pay it back.
While a chattel mortgage can be used to purchase any business asset, they are most commonly used to purchase business vehicles.
What’s the difference?
At first glance, a consumer car loan and a chattel mortgage seem to be very similar offerings, and in a lot of ways, they are. The primary difference between a consumer car loan and a chattel mortgage is that a consumer car loan is more so for personal use and a chattel mortgage is for business use.
What are the benefits of a chattel mortgage over a consumer car loan?
If you will not be using your new vehicle for business purposes, a chattel mortgage may not be an option for you. However, if the car will be used for work, there are a few benefits of a chattel mortgage over a consumer car loan.
Lower interest rates
Typically, chattel mortgages come with lower interest rates. This is because chattel mortgages are secured loans, so the vehicle you are purchasing can be used as security.
Flexible payment structure
You can choose to set up a balloon/lump sum payment at the end of your term to lower monthly repayments. This allows more cash flow in the long term, but can increase your interest paid over time. Ensure you check your agreement with the lender before you decide to proceed with this.
Tax credit benefits
Since you will be using the vehicle for business purposes, you can claim depreciation and interest costs on tax (depending on the level of business you will be using the asset for). Your business can also claim the initial GST amount of the asset’s purchase. If you’d like to know more about the tax benefits of a chattel mortgage, refer to ‘chattel mortgage – tax and GST implications’.
What to consider before taking out a chattel mortgage
There are a range of lenders that offer chattel mortgages. To ensure you are getting the best deal for your individual circumstances, it’s always a great idea to compare lenders. You could get better deals based on the type of vehicle you’re purchasing and what business you are operating. It never hurts to ask. Ask yourself these questions before you apply to ensure a chattel mortgage is right for you:
- Will I benefit from chattel mortgage tax and GST benefits?
- How much interest will I pay over the life of my loan? Is this better than if I were to get a consumer car loan?
Why should I consider a consumer car loan?
A consumer car loan is a great option for you if you will be using the vehicle for personal reasons. There are a variety of lenders that offer car loans, so you may be able to find an option very suited to your specific needs. Here are a few of the benefits of car loans as a form of finance:
- You can purchase a car with no money drawn from your bank account (i.e. you don’t need to make a lump sum payment – you will pay it back over time in installments)
- You can build your credit history (as long as you meet your repayments on time)
- There are typically low interest rates on secured car loans (most lenders offer secured car loans depending on the amount you are borrowing)
Car Loan Tips
No matter how you choose to finance your car, there is always an added expense to factor in when repaying your loan or mortgage. Here are a few car loan tips for you to consider when financing your car.
Set up a budget
Ask yourself how much you can realistically afford to spend. Most lenders won’t offer you credit that is more than 20% of your income, so it’s important to factor this into your budget.
You may have to reduce your spending in certain areas to afford your monthly loan repayments. You also need to factor in the costs of running your car, like insurance, petrol and registration.
Keep the loan term as short as possible
The shorter the loan term, the less interest you pay over time. Figure out what a realistic timeframe is for you to repay your loan and find a lender that will suit this. Alternatively, you could borrow from a lender like Jacaranda Finance that doesn’t charge an early settlement fee. This way, you can aim to repay your loan in a short term but can take longer if you need to.
Save up for a deposit
Try and save up a hefty deposit to put down on the car. This will not only save you money on your loan, but it will also indicate to lenders that you are able to be responsible with your money. Aim to save 10% of the purchase price if you can. You can borrow for 100% of the car’s purchase, but again, this will cost you more in the long term.
Check and review your credit
The better your credit score, the more room you have to negotiate a better deal on your chattel mortgage or consumer car loan. You should make yourself familiar with your credit score and look over your credit report for any mistakes. If you find any, contact the credit reporting bureau and have these amended straight away. You can access a free copy of your credit report once every year from each of the following credit bureau’s
Car loans with Jacaranda
If you’ve settled upon a consumer car loan, you’re in luck! Jacaranda Finance offers car loans for new and used cars up to $35,000. You could have your money in your account and ready to use on the same day that you submit your application.
Jacaranda offers car loans that range from $5,000 to $35,000 with repayment terms from 1 to 4 years. This means you have plenty of time to comfortably repay your loan. We don’t charge early repayment fees, so if you wish to repay your loan before this period, you are free to do so. All of our car loans are secured, which means that we can offer competitive car loan interest rates.
Before you apply for a car loan, please refer to the Moneysmart website. If you are unsure how applying for a car loan will affect your credit score, read our blog.
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Written by Jacaranda Team