When you are deciding to get a loan for a car, or for a mobile home, you may be asked to choose between a chattel mortgage or a hire purchase agreement. You may also be considering these if you are looking to get heavy machinery or manufacturing equipment. Start-up money for a business can be out of reach for most people, and few options may be available.
Chattel and hire purchasing loans can get you the funds that you want, with decent terms and options. A lender may not give you a choice from the two, but if they do, there are some differences that you should understand before deciding between them.
Hire Purchase Loan
Investopedia defines a hire purchase agreement as being a type of loan that does not give you ownership of the item until it is completely paid off. This means that the lender owns it if you are making payments on it. This offers the best protection for the lender because they do retain the ownership.
The main benefit of a hire purchase is that new companies, or ones with low capital, can get products, such as manufacturing equipment, when they would normally not qualify to get. Banks require you to show a positive cash flow but do not take into account that you are just starting out. To start a business, you need money. Funds that this loan could give to you can help you buy the startup equipment that you need.
Chattel Mortgage
With this loan you have some ownership in the item. This is important when filing taxes because it can be written off as an expense, and the depreciation can be deducted on a yearly basis. It is only used with movable items, such as cars, heavy machinery, or even a mobile home. The item that you are buying becomes what the lender puts a lien against.
The main benefit of this type of loan is that it may be the only option available when a private party attempts to buy a mobile home. Mobiles are not a good risk for traditional mortgage loans, so a chattel mortgage would have to be used in order for you to get help buying a movable home.
Which One
The easy answer would have to include a quick question to you. For what are you needing to borrow money? If it is a movable item, as listed above, then a chattel would be the best way to go. If you are buying items that are stationary, such as manufacturing equipment to start a business, you would need to go with a Hire Purchase. The only reason you would want to go with the hire loan option would be if the item needed is not considered movable.
The type of item being purchased should be one of the main factors when deciding which type of loan to go for. Chattel mortgage is better when it comes to the amounts of discounts that you can get on your taxes. They both come with set interest rates and terms. The length of time to pay them off are both much less than a regular loan, which allows you to pay it off faster. This can mean steeper payments for you to obtain full ownership quicker.
No matter which way you decide to go, you must remember that not all of them are equal. Check the interest rates and payment terms with several different lenders and you will see how much of a difference they are. Read everything and then pick the one that works the best for you, with the most manageable payments.
