Equipment finance in Australia: chattel mortgage vs finance lease vs hire purchase
How chattel mortgages, finance leases and hire purchase compare for Australian businesses buying vehicles and equipment, with balloon payment arithmetic.
For most Australian small businesses buying a ute, truck, excavator or kitchen equipment, the choice is between a chattel mortgage (you own the asset from day one and the financier takes security over it), a finance lease (the financier owns it and you rent it, with a residual at the end) and, less commonly now, hire purchase. Because the asset itself is the security, equipment finance is usually cheaper than an unsecured loan. The two things that most often surprise borrowers are the balloon payment at the end and the GST and tax treatment, which differs between structures.
This guide is part of the small business loan rates overview. Figures are illustrative.
The structures compared
| Feature | Chattel mortgage | Finance lease | Hire purchase | Operating lease / rental |
|---|---|---|---|---|
| Who owns the asset during the term | You | Financier | Financier until final payment | Financier |
| Security | Registered over the asset on the PPSR | Financier's ownership | Financier's ownership | Financier's ownership |
| End of term | Pay any balloon; asset is yours | Pay the residual, refinance or return as agreed | Ownership passes on final payment | Return or upgrade |
| GST (registered business) | GST on purchase price generally claimable in the BAS for the purchase period | GST is included in each rental | Depends on structure | GST in each rental |
| Tax deductions | Depreciation and interest | Lease rentals | Depreciation and interest (generally) | Rentals |
| Suits | Businesses wanting ownership and the GST credit upfront | Businesses preferring rentals | Specific cases | Assets upgraded often |
Tax treatment depends on your circumstances; the column above describes how these structures commonly work. Confirm with your registered tax agent before choosing, especially for vehicles, where car limits and private use rules apply. Equipment rental without finance is a separate market with its own costs.
Worked example: chattel mortgage with and without a balloon
A landscaping business buys a $90,000 (ex-GST) machine over five years at an illustrative 8.5% a year.
Option 1: no balloon
- Monthly repayment: about $1,846
- Total interest over 60 months: about $20,800
Option 2: 30% balloon ($27,000) due at the end
- Monthly repayment: about $1,484
- Total paid: 60 × $1,484 + $27,000 = about $116,000
- Total interest: about $26,000
The balloon lowers the monthly payment by about $362 but adds about $5,200 in interest, because you owe more for longer. It also leaves you with a $27,000 bill in year five. If the machine is then worth less than $27,000, you would be paying out more than it is worth, and if you trade it in, the shortfall comes out of your pocket or rolls into the next loan.
You can check the no-balloon figures in the repayment calculator; it does not model balloons, so treat the balloon example as a separate calculation.
Matching the term to the asset
Lenders set maximum terms and balloon percentages by asset type and age. As a principle, the loan should be paid down faster than the asset loses value. A five-year term on equipment that is worn out in four leaves you paying for something you no longer use.
| Asset | Questions to ask |
|---|---|
| Light commercial vehicle | Expected kilometres, resale market, private use percentage |
| Heavy vehicle or yellow goods | Hours of use, maintenance cost, resale demand in your region |
| Medical, dental or hospitality equipment | Technology lifespan, supplier service contracts |
| Used equipment | Age limits at end of term, valuation, inspection |
Costs beyond the rate
- Establishment and documentation fees
- PPSR registration fee (passed on by many financiers)
- Monthly account keeping fees
- Early payout fees or loss of interest calculations if you sell early
- Brokerage, sometimes built into the rate rather than charged separately
- Insurance, which the financier will require on the asset
The fees guide lists what each fee should look like in your documents.
Tax incentives: check the current year
Small businesses can often deduct depreciating assets quickly under simplified depreciation rules, including the instant asset write-off. The threshold, eligible turnover and dates have changed many times and are set by legislation for each income year. Do not rely on a figure from an advert or an old article: check the ATO's simplified depreciation pages for the year you will start using the asset, and remember the deduction reduces tax on profit; it does not make the asset free.
Checklist before signing equipment finance
- Get the cash price, the amount financed, the rate, all fees and the balloon in writing.
- Confirm whose name the asset and finance are in (company, trust or individual).
- Ask how early payout is calculated.
- Check the asset is not already encumbered: search the PPSR by serial number for used equipment and vehicles.
- Check whether a director guarantee is required.
- Ask your tax agent about GST, depreciation and private use before choosing the structure.
Related guides
If you are choosing between equipment finance and a general business loan, compare the secured and unsecured options, and check whether a CEFC-backed discount is available through government-backed finance.
Frequently asked questions
Is a chattel mortgage a consumer loan?
Not when it is used predominantly for business purposes. It is then generally outside the National Credit Code, so consumer protections such as comparison rate disclosure usually do not apply.
Can I finance a used vehicle bought privately?
Many financiers will, subject to age limits, inspection and a PPSR search showing no existing security. A clear PPSR search protects you from buying an asset a previous owner's lender still has an interest in.
What if I want to sell the equipment before the end?
You will need to pay out the finance, usually from the sale proceeds. Ask for a payout figure first, as it may include fees.
Does a bigger deposit lower the rate?
Sometimes, because the lender's risk falls. At minimum it lowers repayments and total interest.
Sources
- ATO — simplified depreciation, instant asset write-off and GST on financed assets
- PPSR — search for security interests over vehicles and equipment
- business.gov.au — buying or leasing equipment
- ASIC — finance industry conduct rules
