Chattel Mortgage Vs Lease - What’s the difference?

Having extra cash to purchase commercial vehicles outright is a luxury most businesses can’t afford. That’s why many lenders and dealerships offer a range of financing options to facilitate equipment finance purchases – these can help ease cash flow, provide tax benefits and allow you to afford a better, more reliable and useful vehicle.

When purchasing a new or used vehicle for your business each finance option available has its own unique characteristics that will impact your business. When searching around you’ll most likely encounter the terms chattel mortgagefinance leasenovated lease and operating lease as these are the most popular options. In this article we explore what exactly each of these mean and their pros and cons to assist in your decision-making.

What is a Lease? 

In broad terms a lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. Property, buildings and vehicles are common assets that are leased. There are three common types of vehicle leases: the operating lease, the finance lease and the novated lease.

Finance Lease

A finance lease is where you pay to use the vehicle, much like a long-term rental agreement. The lessor takes the risk on the purchase and resale of the vehicle, and it frees up your business capital that may otherwise be tied up with ownership of the asset. Your business pays monthly instalments, or rental payments, that go towards the car, you then pay out the residual value of the vehicle at the end of the lease or your business simply returns the asset at the end with no resale value risks. 


  • Budgeting is easier as you agree to a fixed price for the term of the lease.
  • A finance lease gives the business use of an asset of newer or higher specifications than they could otherwise buy outright.
  • You can continue to upgrade the vehicle to the latest model at the end of the lease period.
  • The cost of the asset is paid by monthly instalments over the long term rather than a large upfront investment, these payments are at an interest rate that will not increase even if bank interest rates rise.
  • This leasing option has tax benefits for business owners as they can claim the whole repayment as a tax deduction.
  • You have the option to refinance the residual value payment and continue leasing the same asset if you don’t wish to trade it in.


  • Vehicle maintenance costs throughout the lease period are your responsibility; registration, insurance, servicing etc.
  • There is some risk at the end of the lease if you or the finance provider choose to sell the asset on and the sale comes to less than the residual value you agreed to when signing on for the lease. You will have to make up the difference.

Novated Lease

A novated lease is a unique employee-benefit arrangement that involves you, your employee and a financier, and can last between one and five years.

It’s a form of ‘salary packaging’ that helps finance new or used vehicles by repayment obligations made from an employees pre-tax salary. This can effectively reduce your taxable income and also can allow you to bundle your vehicle’s expenses into one simple payment.


  • A novated lease can include everything from maintenance to fuel and insurance.
  • Business owners save significant time and money compared to administering their own fleet of vehicles or assets.
  • No residual/balloon payments at the end of the lease period.
  • Reduces payroll-tax and WorkCover premiums.


  • You don’t own the asset, and it’s in the employee’s name, so you can’t give it to another employee for work use.

Operating Lease

An operating lease is a rental agreement used to finance a vehicle for less than its useful life, with the vehicle able to be returned to the lessor at the end of the lease period without any further obligation. It has a shorter term generally than its lease counterparts, due to this you are able to upgrade to a new vehicle regularly. You may even be able to do this whilst the lease is still active. The difference between an operating lease and a finance lease is that the user will not be able to buy the vehicle during the period of the lease.


  • Operating leases provide greater flexibility to businesses as they can replace/update their vehicles more often.
  • No risk of the vehicle becoming obsolete, as there is no transfer of ownership.
  • Lease payments are tax-deductible.


  • The lessee never gains ownership over the vehicle and it must be returned at the end of the agreement. A new lease agreement will then need to be made for the same asset, or a replacement purchased.

Chattel Mortgage

When it comes to car finance, a chattel mortgage is a very popular option among business owners and operators. A chattel mortgage has a similar structure to a fixed-rate traditional mortgage whereby the finance provider uses the vehicle as the security for your loan. Chattel refers to the car or equipment, and mortgage refers to the loan. Unlike a lease it gives you ownership of the vehicle right away and you then pay off the loan from the income the asset generates in your business. If you’re unable to meet your repayments, your finance provider may be able to repossess your vehicle. 


  • Repayments can be structured over a range of terms – usually between 2 to 5 years.
  • Interest rates are generally lower than unsecured loans and can be fixed or variable.
  • Repayments can be fixed at the same amount each month or can be structured to fit your seasonal cash flow requirements.
  • A balloon or residual payment can be set at the end of the term to lower your monthly payments.


  • You are responsible for all running costs and maintenance of the vehicle.
  • The business only has full ownership of the asset when the term of the mortgage ends.

So Chattel Mortgage vs Lease, which is right for my business?

There’s a lot to digest with these chattel mortgage and lease options and it can seem overwhelming when looking to source finance for business equipment, that’s why we’re here to help! 

Learn more: Buying A Vehicle For Your Small Business - 3 Important Things To Consider

If you need assistance evaluating the above, get in touch today with one of our commercial vehicle finance specialists on 1300 755 494 and we can help find the best loan option for your business, or if you’d like to get started now you can apply online using our simple platform here

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