If you’re a business and in the market for an auto loan, there is a type of auto finance product you may not have heard of that brings many benefits along with it. It’s a secured transaction called a chattel mortgage. A chattel mortgage is a finance arrangement that allows a debtor to take ownership of a moving piece of property – in this case, a car – using funds supplied by a lender. In return, the lender takes out a mortgage on that property until the loan is repaid. Chattel mortgages also known as security agreements in the United States and are defined under Article 9 of the Uniform Commercial Code.
This lien is a security on that property giving them clear recourse to seize the property if you are unable to keep up with repayments.
Depending on where you operate, you may be able to claim significant tax breaks, if you use the vehicle for business use. This may depend on your state’s laws and regulations related to business transactions.
Businesses take out chattel mortgages due to their predictability. A chattel mortgage auto loan will generally have fixed interest rates and repayment schedules so businesses can plan ahead of time and estimate how much of the debt will retire each fiscal year.
If you sign a promissory note and back your auto loan with a security, chances are lenders will reduce your APR compared to unsecured finance options. This lower APR reflects the reduced risk your lender agrees to take on. The lender has a clear and proper recourse in the event of a default.
Another advantage is that you may offset your monthly repayments with a balloon payment, payable at the end of your loan term. The balloon payment is a portion of the residual value of your automobile set aside as a lump sum. Some lenders may be nervous about approving a balloon payment. If your credit score is good, it’s possible they will grant you a balloon payment. Others may insist you set aside some money in a Tax Free Savings Account, making sure you can pay off the balloon when it’s due. In some cases, you may refinance your balloon payment with other traditional loans.
For more information, it’s best to consult a licensed financial professional about chattel mortgages or secured transactions to see if they are right for you and your business situation.