Chattel mortgage vs lease vs hire purchase

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Chattel mortgage vs lease vs hire purchase 

A chattel mortgage, lease and hire purchase agreement are all finance options to purchase business assets like vehicles, equipment or machinery. They can interchangeably be referred to as asset finance or equipment finance. However, there are some key differences and considerations to each commercial agreement. We explain everything below. 

Key points about chattel mortgage vs lease vs hire purchase  

  • The median loan amount for a chattel mortgage is $50,000, according to Lend proprietary data 
  • You can take out a chattel mortgage to finance vehicles used for business purposes
  • With hire purchase, you don’t own the asset until after the last payment
  • A finance lease can have flexible repayment schedules
  • With an operating lease, you can upgrade the assets within the lease period
  • Repayments on asset finance and depreciation can be tax deductible

The difference between a chattel mortgage vs lease vs hire purchase 

The main differences between a chattel mortgage, lease, and a hire purchase agreement come down to: 

1. Ownership or the option of ownership of the asset(s) you’re financing

2. Tax benefits

The best type of asset finance for your business will depend on the asset(s) you want to acquire or lease, their value and lifespan. Generally, a chattel mortgage will be most suitable to purchase business vehicles. 

How does a chattel mortgage work?  

A chattel mortgage works like a secured car loan for vehicles or assets purchased primarily for business purposes. The lender will give you the money to buy the vehicle or asset (known as the chattel) and you repay the loan with interest over a fixed term (that’s the mortgage part). The asset itself serves as security for the loan. The median loan amount for a chattel mortgage is $50,000, according to Lend proprietary data. 

Chattel mortgage asset ownership 

Your business maintains full ownership of the vehicle or assets through the entire loan term. This means you’re responsible for registering, maintaining and insuring the asset. 

Chattel mortgage tax benefits 

You can claim the GST on the initial vehicle purchase as an input tax credit through your Business Activity Statement (BAS). You can also claim interest on the loan and the depreciation on the vehicle as a tax deduction. 

Chattel mortgage pros & cons

Pros Cons
  • Lower interest rates than a personal car loan
  • No upfront deposit in most cases
  • Interest on the finance and depreciation of the asset may be tax deductible
  • You’re responsible for all running and maintenance costs on the vehicle or equipment
  • Early payment fees may apply
  • Borrowers are not protected by the National Consumer Credit Protection Act (NCCPA), unlike personal car loans    

What’s a chattel mortgage used for? 

A chattel mortgage is most commonly used to purchase business vehicles and high-value equipment or machinery. That’s why it’s a popular asset finance option for small businesses with a vehicle fleet and for manufacturing industries, construction companies, tradespeople and transport companies. According to Lend proprietary data, 15% of small businesses opt for a chattel mortgage to buy vehicles.

How does a hire purchase work?  

A hire purchase or commercial hire purchase (CHP), is a finance agreement to buy a vehicle or equipment for business purposes over an agreed period. The lender (lessor) buys the asset at your request, and your business hires it in return for regular repayments. During the hire purchase period, your business is responsible for maintaining and insuring the asset. You have the option to purchase the asset outright at the end of the agreement. 

Hire purchase asset ownership 

Ownership of the vehicle or equipment is transferred to your business after the residual or balloon payment is made. A balloon is a lump sum payment due at the end of the loan term.

Hire purchase tax benefits  

You can claim GST on the purchase price (when you purchase the asset at the end of the lease). The interest component of the loan and depreciation are also tax deductible if you use the asset(s) to generate income. 

Hire purchase pros & cons

Pros Cons
  • You own the asset or vehicle at the end of the loan period
  • Flexible repayment terms
  • Potential tax deductions on interest and depreciation costs on the vehicle or equipment
  • Monthly repayments for hire purchase tend to be higher than for a lease
  • You’re responsible for registration, insurance and maintenance costs
  • You don’t have the flexibility to sell or modify the asset without the lender’s approval

What’s a hire purchase used for?  

A hire purchase agreement is more suitable to buy assets with a medium to long lifespan and medium value. It’s a popular asset finance option for hospitality, retail and white-collar industries (e.g. administration, medical, law, finance). As you’ll own the asset at the end of your term, a hire purchase loan isn’t ideal if you believe you’ll need to upgrade the asset throughout this period. 

How does a finance lease work?  

A finance lease or capital lease agreement gives you operating control of an asset. The lender (lessor) buys the asset on your behalf and leases it to your business for fixed payments over a period of time. The lender has ownership of the asset during the lease term. 

Finance lease asset ownership  

At the end of the contract term, you have the option to purchase the asset from the lender with a residual value/balloon payment or to return it.

Finance lease tax benefits  

You can claim GST credits for any GST included in the lease charges. The capital and interest portion of lease payments are tax deductible throughout the lease term. You cannot claim depreciation as the lessor owns the asset(s) during the lease term. 

Finance lease pros & cons

Pros Cons
  • The asset or equipment doesn’t have to be recorded on your balance sheet
  • Repayments are fixed over the term of the lease 
  • GST and interest on the finance are tax deductible   
  • Higher administration costs
  • You’re responsible for registration, insurance and maintenance costs
  • A finance lease is a noncancellable  

What’s a finance lease used for? 

A finance lease is often used to buy long-term assets or equipment that can hold value after the lease term. This could include medical equipment, large machinery, high-value construction tools like cutting and drilling equipment, etc.  

How does an operating lease work?  

An operating lease works like a rental agreement. The lender buys fixed assets — vehicles or equipment — and leases them to your business in exchange for regular payments over a fixed period of time (the term of the contract). You can usually upgrade the equipment within the lease period. 

Operating lease asset ownership  

Your business has no ownership rights. You will need to return the asset(s) to the lessor by the end of the lease term or renegotiate another lease under new terms.  

Operating lease tax benefits  

Lease payments are considered operational expenses and, therefore, tax deductible. You cannot deduct depreciation for tax purposes. 

Operating lease pros & cons

Pros Cons
  • Lower interest rates compared to other types of equipment finance
  • You can upgrade the assets within the lease period
  • Maintenance and operating costs are included in the lease repayments  
  • You never own the assets
  • You have to renegotiate and renew the lease after the contract period is over if you want to keep using the equipment/assets
  • No equity or profitability on assets 

What’s an operating lease used for? 

On operating lease is more cost-effective than paying cash for low-value assets with a short lifespan like IT equipment, payment or telecommunications systems, etc. The assets are expected to depreciate or become obsolete by the end of the lease term. 

Other vehicle and equipment finance options 

Novated lease: A novated lease allows you to finance a new or used car and make repayments on the finance from your pre-tax salary with approval from your employer under a salary sacrifice arrangement. 

Personal car loan: You may apply for a personal car loan if your vehicle is primarily for private use, but can sometimes be used for work purposes (e.g. freelancers, part-time employees, etc).  

Best asset finance lenders in Australia 

Here is a list of reputable asset finance lenders in Australia: 

  • AMMF
  • Angle Finance
  • ANZ
  • Azora
  • Banjo
  • Westpac
  • Branded Financial Services
  • Capital Finance
  • Drive Finance
  • Finance One
  • Flexi Commercial
  • Grenke
  • Group & General Finance
  • Grow Finance
  • Iron Capital
  • Macquarie Capital
  • Metro Finance
  • Moneytech
  • Morris Finance
  • Multipli
  • Pepper Money
  • Plenti
  • Resimac
  • ScotPac
  • Selfco Leasing
  • Shift
  • Thornmoney
  • Vestone Capital

FAQs about chattel mortgage vs lease vs hire purchase

What are interest rates on a chattel mortgage, lease and hire purchase?

Interest rates on a chattel mortgage, lease, and hire purchase will depend on the asset(s) you’re financing, the contract term and whether there’s an ownership option at the end of the term. Be sure to compare the interest rates separately from potential tax benefits. A chattel mortgage often has a lower interest rate as the asset is secured against the loan.

Where can I get a chattel mortgage, lease or hire purchase?

You can get a chattel mortgage, lease, or hire purchase from traditional banks (e.g. Westpac, NAB), non-bank lenders or specialist asset finance lenders. Be sure to compare rates from different lenders before you make a decision, but avoid submitting loan applications with multiple lenders as this could hurt your business credit score.

Hire purchase vs chattel mortgage: What’s best?

It depends on when you want ownership of the asset(s). With a chattel mortgage, you get immediate ownership and, therefore, the flexibility to sell or modify the assets, but you also bear the risk of depreciation. On the other hand, a hire purchase has limited flexibility until you own the assets at the end of the term and there’s the risk of repossession if you default on the loan. In both cases, you claim an input tax credit on the asset's purchase price and interest payments on the loan as a tax deduction.

Chattel mortgage vs finance lease: What’s best?

The difference between a lease and chattel mortgage comes down to the type of agreement and benefits you seek. A chattel mortgage might be more suitable if you prioritise ownership and potential tax benefits. On the other hand, if you prefer lower upfront costs and the option to upgrade the assets regularly, a finance lease could be a better fit for your business. A finance lease may allow businesses to keep the leased assets off the balance sheet. Be sure to review the terms, interest rates, and total costs of both finance options.

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