Chattel Mortgage vs Finance Lease vs Hire Purchase vs Rental: How Equipment Finance Options Compare
A chattel mortgage, a finance lease, hire purchase and a rental (operating lease) are the four main ways to finance business equipment. The key differences are who owns the asset during the term, whether there's a balloon or residual at the end, and how GST and depreciation are treated, which is a question for your accountant.
This post sets out how each one works so you can have an informed conversation with your accountant and lender. For an overview of the asset types we finance, see equipment and asset finance.
How do they compare?
| Chattel mortgage | Finance lease | Hire purchase | Rental / operating lease | |
|---|---|---|---|---|
| Who owns it during the term | You; lender holds security | Financier | Financier | Financier or rental provider |
| At the end | You own it outright once paid off | Pay the residual, refinance or return | Ownership passes on final payment | Return, upgrade or extend |
| Balloon / residual | Optional balloon | Residual value | Optional final payment | Usually none |
| GST and tax | Treatment differs between structures and depends on your circumstances. Speak with your accountant and check current ATO guidance. | |||
| Often used for | Vehicles, machinery you plan to keep | Assets you may or may not keep | Assets you want to own at the end | Technology you upgrade regularly |
What is a chattel mortgage?
With a chattel mortgage, you buy the equipment and own it from day one, and the lender registers a security interest over it. You can usually choose a balloon at the end to lower repayments. A balloon lowers repayments but leaves a lump sum to pay, refinance or cover by selling the asset at the end.
What is a finance lease?
The financier buys the equipment and leases it to your business for a fixed term, with a residual value set at the start. At the end you may be able to pay the residual and keep the asset, refinance the residual, or return it, depending on the agreement.
What is hire purchase?
Under hire purchase, the financier owns the asset while you pay it off in instalments, and ownership transfers to you when you make the final payment. It sits between a chattel mortgage and a lease in how it's structured.
What is a rental or operating lease?
A rental or operating lease lets you use equipment without intending to own it, and is common for technology that dates quickly. Some agreements include servicing or upgrade options. Check the total cost over the term against buying.
What about the instant asset write-off?
Instant asset write-off and depreciation rules change from year to year and depend on your business's circumstances. We don't give tax advice. Check the current position on ato.gov.au and confirm with your accountant how each structure would be treated for your business before you choose.
Questions to ask before you decide
- Do you want to own the asset, and for how long will you keep it?
- How will the structure affect your GST, depreciation and tax position? (Ask your accountant.)
- Would a balloon or residual help cash flow, and how will you pay it at the end?
- What is the total dollar cost over the term, including fees?
- Are there early payout costs if you upgrade or sell early?
For larger or specialised equipment, see also plant and equipment finance.