Chattel Mortgage vs. Hire Purchase: A Simple Guide for Your Business

Understanding a Chattel Mortgage

A Chattel Mortgage is a popular finance option for businesses looking to purchase vehicles or equipment. Under this arrangement, the lender provides funds to the borrower to purchase the asset, and the borrower takes immediate ownership of the asset. The lender then takes a 'mortgage' over the asset as security for the loan.

This structure is often preferred by businesses that use a cash accounting method for GST, as they may be able to claim the full GST on the purchase price upfront. Additionally, businesses can typically claim depreciation on the asset and interest on the loan repayments as tax deductions.

Key Benefits:

• You own the asset from day one.
• Potential to claim full GST on the purchase price upfront (if GST registered and on cash basis).
• Interest and depreciation may be tax-deductible.
• Flexible loan terms and balloon payment options.

Understanding a Hire Purchase

Hire Purchase (also known as Commercial Hire Purchase or CHP) is another common way for businesses to acquire assets. With a Hire Purchase agreement, the lender (owner) purchases the asset on behalf of the customer (hirer), and the customer then 'hires' the asset from the lender over a set period. Ownership of the asset only transfers to the customer once all repayments, including any final balloon payment, have been made.

This option is often suitable for businesses that use an accrual accounting method for GST. While you don't own the asset initially, the repayments are typically tax-deductible, and you gain full use of the asset from the start of the agreement.

Key Benefits:

• Lender owns the asset during the term, transferring ownership at the end.
• Repayments (excluding the GST component) are typically tax-deductible.
• GST is generally claimed on the interest and charges, not the full purchase price upfront.
• Preserves working capital by avoiding a large upfront payment.

A Simple Comparison Table