Chattel Mortgage

Table of Contents

Meaning of Chattel Mortgage

A chattel mortgage is a method of obtaining funds by pledging specifically identified personal properties or inventories. Under the chattel mortgage method, inventories are identified by serial number or by some specific character. Those pledged inventories are owned and hold by the borrower but the lender has full control over them. Inventories cannot be sold without the consent of the lender. Firms with rapid turnover may face the problem of identification of that particular inventory.

So, chattel mortgages are well suited for certain finished goods inventories of capital goods such as machine tools. As the name suggests, a chattel mortgage is a finance agreement that allows a borrower to receive funds for the purchase of an asset. The lender accepts that financed asset as collateral for the loan.

Benefits/Advantages of Chattel Mortgage

Some of the Major Benefits/Advantages of Chattel Mortgage are as follows:

Flexible Payment Structure
Tax Advantages
Balloon Payment/ Residual Payment Can be done
Easily Available
Lower Processing Fees
Repayments are Exempt from GST

a) Flexible Payment Structure

There are a number of ways in which the borrower can structure the repayment. Financing of this nature usually lasts between two and five years. Alternatively, the borrower can pay back the same amount every month. The repayment can also be structured based on the cash flow of the company.Generally, these loans have lower interest rates than traditional loans. Both fixed and variable interest rates are available.

b) Tax Advantages

Borrowers can show the asset on their balance sheet as an asset since they own the asset up-front. It is possible for them to claim depreciation. This expense will also be deducted from the Profit and Loss Account, thereby allowing Income Tax Benefits to be claimed.One of the tax benefits of a chattel mortgage is that the interest on the loan may be tax deductible. This can save you money each year on your taxes.

In addition, the interest on a chattel mortgage is usually a bit lower than the interest on a traditional mortgage. This can save you money over the life of the loan.

c) Balloon Payment/ Residual Payment Can be done

An arrangement like this allows the borrower to determine and propose a residual or balloon payment toward the end of the loan term. Monthly payments are lowered as a result. Balloon payments are payments that are not made until the end of an agreement. With a larger balloon payment, the monthly repayments will be lower. You might be charged more interest over the course of the loan period if you make a larger balloon payment.

Due to the low monthly payment amount, you won’t be repaid a large portion of the principal amount. When making a decision, it is important to consider the overall interest cost and cash flow.

d) Easily Available

It is easier to obtain such financing than a conventional loan, even for borrowers with poor credit history. Having a bad credit history can make getting a loan, renting an apartment, or even applying for a job more difficult. It’s important to clean up your credit history as soon as possible if you want to improve your financial situation.

e) Lower Processing Fees

Such loans usually have lower processing fees than traditional loans.A traditional loan has high processing fees than a chattel mortgage. With a chattel mortgage, the processing fees are low and there are no pre-payment penalties. The customer can also choose their own lender, making the process simpler and faster. The down payment is also lower with a chattel mortgage. This product is perfect for people who want to buy a car or truck without having to go through a lot of red tape.

f) Repayments are Exempt from GST

A chattel mortgage is a loan secured against personal property, such as a car or a boat, which is exempt from GST. Due to the fact that chattel mortgage repayments are exempt from GST in Australia, borrowers can save money on their repayments. During the loan’s term, GST is repaid by adding it to the purchase price of the property being financed.

The borrower, on the other hand, would be responsible for paying GST if the property was not subject to GST. Chattel mortgages allow borrowers to save money on their monthly payments.