If you’re a business looking to purchase a vehicle or other expensive equipment, you may be considering either a chattel mortgage or hire purchase agreement. A chattel mortgage and a hire purchase are two different types of loans.

Both options offer potential financial benefits, but they are very different in terms of ownership and structure.

In this blog post, we’ll discuss what each type of mortgage means and the differences between the two. 

What is a chattel mortgage?

A chattel mortgage is a type of loan that enables you to purchase a vehicle or other asset with money borrowed from a financial institution.

The borrower owns the asset and makes payments to the lender over an agreed term. The collateral for this loan is the asset itself, which means if the borrower defaults on their payments, they risk losing it.

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What is a hire purchase?

Hire purchase is a form of lending in which the borrower pays for an asset over an agreed term.

At the end of the term, ownership of the asset transfers to the borrower. Instead of borrowing money from a financial institution, the borrower enters into an agreement with a third party to lease the asset.

The third party pays for the asset and retains ownership until the loan is paid off in full. 

What is the difference between a chattel mortgage and a hire purchase?

 

The main difference between a chattel mortgage and a hire purchase is that with a chattel mortgage, the borrower owns the asset from the outset of the loan, whereas with hire purchase, ownership transfers to the borrower only after all payments are made.

Since the lender owns the assets acquired through a hire purchase, it’s responsible for any maintenance-related costs associated with the asset. With a chattel mortgage, however, it’s the borrower who’s liable for all such costs.

In terms of structure and repayment options, chattel mortgages generally have higher interest rates than hire purchases and offer shorter loan terms, which means you might have to pay larger monthly payments.

Hire purchases tend to have lower interest rates and less flexible repayments, but the borrower may be able to negotiate a better deal with the third party.

In addition, chattel mortgages and hire purchases are generally used to purchase different things (although this is not a hard and fast rule).

A chattel mortgage is often used to purchase vehicles and machinery, while a hire purchase is usually used to buy tools and equipment.

As a result, the value of the assets bought via a hire purchase is usually lower than the price of the assets purchased through a chattel mortgage.

This also means that assets generally purchased via a chattel mortgage — such as vehicles — have a longer lifespan than those acquired through a hire purchase. 

So, which one is better? 

The answer to this question depends on your needs and preferences. The best thing to do when deciding between the two options is to consult your accountant.

They will be able to advise you on the more suitable option based on your financial situation, as well as provide useful insights into the pros and cons of each.

Ultimately, both chattel mortgages and hire purchases can offer potential financial benefits for businesses looking to purchase vehicles and other assets — but it’s important to understand the differences between the two and make an informed decision.

Can you terminate a hire purchase agreement?

Yes, you can terminate a hire purchase agreement and return the asset to the lender. However, it is important to check your contract for any penalties or fees that may be incurred in doing so. 

Do you need a high credit score for a hire purchase?

No, you don’t need a high credit score for a hire purchase. Lenders generally take into consideration other factors such as your income and the amount of deposit you are able to pay when assessing your eligibility for the loan. Additionally, lenders may also consider the age and condition of the asset you are looking to purchase.

However, keep in mind that if you fail to pay your instalments on time, your credit score may be negatively impacted.

Do hire purchase loans have variable interest?

No, hire purchase loans generally come with fixed interest rates, which is helpful for budgeting and planning purposes. The interest rate is usually set at the time of signing the contract, so it will remain constant throughout the loan period.

Are there any other names of a chattel mortgage?

Yes, a chattel mortgage may be referred to as:

• Personal property security 
• Movable hypothecation 
• Lien on personal property 

Can you make extra payments after taking out a chattel mortgage?

Yes, you can make extra payments after taking out a chattel mortgage. Making additional payments may help you pay off the loan faster, allowing you to save on interest.

This is especially helpful since assets acquired through a chattel mortgage usually have a high value.

However, it’s important to check your contract first to make sure that there are no additional fees associated with making extra payments.