Quick Summary
True Ownership: A chattel mortgage gives you ownership of the asset from day one, allowing you to build equity. Rent-to-own means you don’t own the asset until the final payment is made.
Significant Cost Savings: Over the long term, a chattel mortgage typically has lower total costs due to better interest rates and fewer hidden fees compared to rent-to-own agreements.
Tax Advantages: With a chattel mortgage, businesses registered for GST can often claim the entire GST portion of the asset’s price upfront on their next BAS.
Flexibility & Control: Chattel mortgages offer more flexible structures, like balloon payments to manage cash flow, giving you greater control over your finances.
As a business owner in Western Australia, acquiring the right assets—whether it’s a new ute, a coffee machine, or heavy machinery—is critical for growth. You’ve likely come across “rent-to-own” deals that promise a quick and easy way to get the gear you need without a large upfront cost. While they can seem appealing on the surface, these agreements often hide significant costs and contractual traps that can hurt your business in the long run.
This article will pull back the curtain on rent-to-own agreements and compare them directly with a chattel mortgage, one of the most popular and effective forms of asset finance in Australia. We’ll show you why taking the time to secure the right finance from the start can save you thousands and put your business in a much stronger financial position.
What Exactly is a Rent-to-Own Agreement?
The Basic Premise
A rent-to-own agreement, often called a “hire purchase” or “lease-to-own,” is a contract where you rent an asset for a fixed period. You make regular rental payments to a finance company, which owns the asset throughout the term. At the end of the contract, you typically have the option to purchase the asset for a pre-agreed (or sometimes residual) value.
Who Do They Target?
These agreements are often marketed towards startups, businesses with a limited credit history, or those who have been declined for traditional finance. The application process can seem faster and less stringent, which is a major drawcard for businesses under pressure to get an asset quickly. However, this perceived convenience often comes at a high price.
The Clear Alternative: Understanding the Chattel Mortgage
How It Works
A chattel mortgage is a straightforward loan for a specific business asset (the “chattel”). A lender provides the funds to purchase the asset, and you take ownership of it immediately. The lender takes a “mortgage” (or security interest) over the asset until the loan is fully repaid. It’s the standard and most common way Australian businesses finance vehicles and equipment.
The Power of Immediate Ownership
This is the single biggest difference. From day one, the asset is on your balance sheet. This means you are building equity with every single repayment. You are not just a renter; you are an owner. This is a crucial distinction for building the long-term value of your business. If you are exploring refinancing options, such as a Commercial Balloon Refinance, having equity in your assets is vital.
The Real Cost of an Asset: $60,000 Ute over 5 Years
Feature
Chattel Mortgage
Rent-to-Own
Assumed Interest Rate
Chattel Mortgage
7.5% p.a.
Rent-to-Own
10.5% p.a.
Monthly Payment
Chattel Mortgage
$1,190
Rent-to-Own
$1,288
Total Repayments
Chattel Mortgage
$71,400
Rent-to-Own
$77,280
Total Interest / Cost
Chattel Mortgage
$11,400
Rent-to-Own
$17,280
Ownership
Chattel Mortgage
From Day 1
Rent-to-Own
At end of term, after final payment
Upfront GST Claim (on BAS)
Chattel Mortgage
$6,000
Rent-to-Own
$0 (GST claimed on each monthly payment)
Ownership, Equity, and End-of-Term Obligations
Building Equity vs. Paying Rent
With a chattel mortgage, every payment reduces your loan principal and increases your equity in the asset. This equity becomes a valuable part of your business. With rent-to-own, your payments are simply rent. You build zero equity until the contract ends and you make the final purchase payment. If you decide not to buy, you’ve spent thousands with nothing to show for it.
What Happens at the End of the Term?
Chattel Mortgage: Once the final payment (and any balloon payment) is made, the lender removes their security interest, and you own the asset outright, free and clear.
Rent-to-Own: You face a choice. You can either pay the final purchase price to take ownership, return the asset (and lose everything you’ve paid), or potentially upgrade to a new rental agreement, starting the cycle all over again.
Frequently Asked Questions
Is rent-to-own the same as leasing?
They are very similar, but “rent-to-own” or “hire purchase” specifically implies an intention to buy at the end, whereas a standard lease might not.
Can I claim tax deductions with rent-to-own?
Yes, the rental payments are typically treated as an operating expense and are tax-deductible.
What are the tax benefits of a chattel mortgage?
You can usually claim depreciation on the asset and the interest portion of the loan repayments as tax deductions. Plus, you can claim the full GST upfront.
Why is the interest rate higher on rent-to-own?
Lenders price in a higher risk for businesses that may not qualify for traditional loans, resulting in higher rates and fees.
What happens if I miss a payment on a chattel mortgage?
The lender will work with you, but if you default, they can repossess the asset to recover the loan balance.
What happens if I miss a payment on a rent-to-own?
Similar to a chattel mortgage, the provider can repossess the asset. However, since you have no equity, you lose all the rental payments you’ve made.
Can I get a chattel mortgage with a new business?
Yes, absolutely. Many lenders, especially when working through a broker, have options for new ABN holders, particularly if you have a solid business plan and a deposit.
Is a balloon payment available with rent-to-own?
No. Balloon payments are a feature of loan products like a chattel mortgage, designed to lower monthly repayments. Rent-to-own is a rental agreement.
Which option is faster to get approved?
Rent-to-own can sometimes be faster, but a good broker can often get a chattel mortgage approved within 24-48 hours, making the speed difference negligible for a much better product.
Why should I use a broker for asset finance?
A broker compares dozens of lenders to find you the best rate and terms for a chattel mortgage, saving you from falling into the high-cost trap of rent-to-own agreements.
Can I sell an asset I have under a chattel mortgage?
Yes, but you must pay out the remaining loan balance to the lender from the sale proceeds.
Red Flags to Watch For in Rent-to-Own Contracts
Inflated Interest Rates and Fees
Because they target a higher-risk market, rent-to-own agreements often have significantly higher effective interest rates than a chattel mortgage. Look out for establishment fees, monthly account-keeping fees, and hefty late payment penalties that can quickly add up.
Inflexible Terms and Conditions
Many rent-to-own contracts are rigid. Want to pay it off early? You might face a penalty or find that the total payout figure isn’t much less than paying the full term. Need to end the agreement? The termination fees can be exorbitant.
Maintenance and Insurance Obligations
Read the fine print. You are often responsible for all maintenance, repairs, and insurance on an asset you don’t even own. If the asset is damaged or stolen, you could be liable for the full replacement cost while still owing payments.
Ready to secure your next asset the smart way? Contact the Varlo Finance team today for an obligation-free chat about our competitive chattel mortgage options.
For the vast majority of Western Australian businesses planning to use an asset for the long term, a chattel mortgage is unequivocally the smarter financial choice. It provides the certainty of ownership, builds valuable equity, offers superior tax advantages, and almost always results in a lower total cost.
While the “no-fuss” marketing of rent-to-own can be tempting, especially when you’re in a hurry, the hidden costs, lack of equity, and restrictive terms can be a significant drag on your business’s financial health. Before you sign any rental agreement, take a moment to consider the true cost and explore the better, more empowering path of ownership through a chattel mortgage.