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Sole Trader or Self Employed? A Guide to Business Vehicle Finance

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When you’re a sole trader, there are many hats to wear and many things to learn about working on and in your business. One big consideration is incorporating your “sole trader car” into your financial equation and making that work for you. This article lays out the basics of how a sole trader can get business vehicle finance, as well as the costs and benefits of doing so.

Business vehicle finance as a sole trader

Many of us remember our first car. Think about yours; the excitement, the sense of liberation, the freedom of independence. If you’re self-employed, or in the process of starting your own business, it’s likely those same feelings that fuelled you to pursue an independent career.

Unfortunately, not everything is as simple as we’d like it to be. That first car might break down in a blaze of bright red car dashboard symbols with meanings that aren’t so pretty, and our dreams might be shattered by not knowing how to spot an overpriced car-service bill.

In this post, we’ll discuss the ins and outs of business vehicle finance, being a sole trader, and cars. Plus, we’ll explain how choosing the right type of finance can help you reclaim that feeling of first-car freedom.

An introduction to business vehicle finance

We know – just reading those words might put you to sleep. Stay with us and we promise we’ll make it worth your time. In our experience, most people get frustrated with car loans because they don’t understand how they work, or which one is most suitable.

This is not your fault! Finding a simple guide to car loans online isn’t easy. When it comes to sole traders and cars, it’s even more complex. Even the most basic guides can suddenly transition to complex math and tax formulas without warning. This could mean getting the wrong type of car loan. Or, struggling with payments because you bought before understanding common car buying costs and the true cost of a vehicle over time.

Thankfully, understanding business vehicle finance doesn’t need to be difficult. For self-employed Australians and sole traders, this all starts with learning about how a chattel mortgage works.

If you live near a salty breeze, wax your car once a month for true beauty and longevity.

Taking out a chattel mortgage for car finance

A chattel mortgage is a car loan specifically designed for businesses. The term ‘chattel mortgage’ is really just a fancy way of saying ‘a secured loan on movable property’. You borrow funds to buy a vehicle, and the lender will note that the vehicle is being used as collateral.

Security and collateral are two words for the same thing. When you take out a loan, the security – e.g. the vehicle – is essentially a guarantee that you will repay the debt.

The main condition of a chattel mortgage is that the vehicle you purchase must be used for business purposes the majority (more than 50%) of the time. In other words, as long as you use the vehicle for your business 51% of the time, you can also drive it on the weekend.

Cost of business vehicle finance

Now let’s quickly look at the burning question many people have: how much will it cost?

Almost all loans include:

  • Principal amount – the size of the loan you apply for (e.g. $30,000)
  • Terms – length of the loan (e.g. 5 years)
  • Interest – an amount you pay on top of repayments on the original loan amount (e.g. 5.55%)
  • Repayment frequency – how often you make payments to the lender (e.g. monthly)

The amount of interest you pay on your principal will be determined by the interest rate applied to the loan and the term. Here’s a super-simple table to show how they work together.

Table showing different types of car and vehicle finance interest rates versus length of repayment terms

A chattel mortgage is a fixed-term loan with a fixed interest rate. Both these elements remain as is unless you refinance your loan or switch to another loan product:

  • Fixed Term – The length of your loan is determined at the start of your agreement.
  • Fixed Interest – The interest rate applied to your loan will not change.

This means you’ll know exactly how long your loan will take to repay, and how much interest you’ll pay over the term. This can be extremely helpful in budgeting for your new business vehicle.

Benefits of business car finance for a sole trader

Now let’s talk about a couple of the awesome things you could do with a chattel mortgage if you’re running your own business.

Tax and GST savings

“Wait a minute,” we hear you say, “I can save on GST and tax?” Well, in some situations, yes you can save expenses when you take out business vehicle finance.

Provided you’re buying your sole trader car from a dealership and not privately through a site like eBay, you can claim back some of the GST applied to the initial sale price. To do this, you’ll need to list the purchase on your next Business Activity Statement (BAS), which allows you reclaim 1/11th of the purchase price up to a maximum of $5,234.

Quick Tip: Basically, this means a car worth $57,581 will be your limit for reclaiming GST. You can still claim back GST for cars worth more than this amount, however you’ll only be able to claim that maximum of $5,234.

The other neat thing about buying a car for business use is that you can claim depreciation on the vehicle. This reduces the tax you pay.

Even better – because the chattel mortgage is technically a business expense – the interest you pay on your regular instalments is also tax-deductible.

Of course, it’s never quite this simple. That’s why we have written a simple article on claiming car expenses for business purposes, which covers the topic in great detail.

Meme of Oprah saying 'you get a new car, you get a new car, you get a new car'

Qualifying and applying: Chattel mortgage checklist

So, what do you need to get a chattel mortgage and successfully secure business vehicle finance? Thankfully, requirements much the same as a standard car loan. There are just a few minor additions specific to owning a business. You’ll need:

  • An ABN (Australian Business Number)
  • To be registered for GST
  • A good credit history (so no defaults or bankruptcies)

There are also two types of application. The easiest one will be if you’re looking to buy a vehicle worth less than $150,000 – likely 99% of you reading this article.

If this is the case, you’ll need to provide some basic documents to prove your identity and income. Generally, a passport or driver licence and six months of bank statements will be enough to apply.

So, what’s the catch?

In terms of securing business vehicle finance, there aren’t any glaring red flags you need to be worried about with a chattel mortgage. In a perfect world, nobody would have to take out a loan, and we could just pay for everything we needed from a giant vault of endless cash.

Sadly, that’s not the case. Especially if you’re a sole trader, and your car is key to your business. It’s even harder if you’re just starting out and don’t have huge cashflow. And this illustrates the main downside of a chattel mortgage:

  • You’re paying interest on a car instead of purchasing it in full.

But not everyone has the patience, budgeting frugality, or time to wait long enough to do that. If you need a car for your business, you need it today, not after you’ve saved for five years.

This conveniently leads to the other disadvantages of a chattel mortgage:

  • Your payments aren’t tax-deductible (only the interest is).
  • You’ll need to have excellent processes in place to track your vehicle use, operating expenses, and the percentage of these that you’ll be claiming as business use.

Why? Because that all needs to be reported in your BAS. This is why one of the first things you’ll need to do – well before applying – is to speak to your accountant (if you have one) and a financial advisor (worth their weight in gold). They will discuss with you your current financial situation and whether you will benefit from a chattel mortgage.

this woman is claiming business/work related car  finance expenses using a calculator

Final thoughts

A chattel mortgage won’t be suitable for everyone. However, the reason it’s one of the most popular types of car finance for businesses is that it’s fit for purpose.

It offers business owners, self-employed workers and sole traders certain benefits that aren’t available with standard car loans. And especially not with high-interest personal loans.

At the end of the day, the best type of car loan is the one most suitable for you. While this article can’t tell you which car loan is the right one, we hope at the very least it helps you avoid choosing the wrong one.

And while you’re thinking about how to finance a business vehicle, and your finances more broadly, why not look into how to compare car insurance and save. Comprehensive car insurance can certainly save you a pretty penny if you’re involved in an accident.

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