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, a hire purchase, and a second charge mortgage are two different types of loans.
These two loans are different in terms of how they are set up and who owns them, but they both help you financially.
We’ll talk about the two kinds of mortgages in this post, as well as the differences between a chattel mortgage and a hire purchase.
What is a chattel mortgage?
With a chattel mortgage, you can borrow money from a bank or other financial institution to buy a car or other asset.
The borrower owns the asset and pays back the lender over a set amount of time. The asset itself backs this loan, so if the borrower doesn’t pay it back, they could lose it.
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What is a hire purchase?
Hire purchase is a form of loan in which the borrower pays for an asset over an agreed term.
The asset will transfer to the borrower at the end of the term. So instead of borrowing money from a financial institution, the borrower enters an agreement with a third party to lease the asset.
The third party buys the asset and keeps it until the loan is paid off.
What is the difference between a chattel mortgage and a hire purchase?
The main difference between a hire purchase and a chattel mortgage is that in a hire purchase, the lender keeps the asset until the borrowers pay off the loan. In a chattel mortgage, the borrowers own the asset.
The lender is responsible for any maintenance costs for the asset because they own it through a hire purchase. With a chattel mortgage, on the other hand, the borrower is responsible for all costs.
Chattel mortgages generally have higher interest rates than hire purchase loans and shorter loan terms. This means that the borrower has to make bigger 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.
Because of this, the assets bought through a hire purchase are usually worth less than the assets bought through a chattel mortgage.
This also means that things that are usually bought with a chattel mortgage, like cars, last longer than things that are bought with a hire purchase.
So, which one is better?
What you need and want will determine the answer to this question. When you have to choose between the two, the best thing to do is talk to your accountant.
They can help you choose the best option for your finances and give you useful information about the pros and cons of each one.
In the end, both chattel mortgages and hire purchases can help businesses buy cars and other assets, but it’s important to know the differences between the two and make a smart choice.
Can you terminate a hire purchase agreement?
Yes, you can terminate a hire purchase agreement and give the asset back to the lender.
But before doing it, always check your contract if there are any penalties.
Do you need a high credit score for a hire purchase?
No, you don’t need a high credit score to get a hire purchase. Whether they will or won’t give you a loan, lenders usually check other things, like your income and the amount of the down payment you can make. Lenders may also look at the age and condition of the asset you want to buy.
It’s important to remember that if you fail to pay your installments on time, your credit score could go down.
Do hire purchase loans have variable interest?
No, hire purchase loans mostly have fixed interest rates. To make it easier for planning and budgeting. The interest is already set in the signing of contract, and it stays the same for the whole 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
After getting a chattel mortgage, can you make extra payments?
Yes, you can. Doing extra payments allows you to pay off the loan faster.
This is especially useful because assets bought with a chattel mortgage are usually worth a lot.
Before doing extra payments, always check your contract to make sure that making extra payments doesn’t come with any extra fees.
