When you lease a truck, you pay monthly payments to a lender who retains ownership of the vehicle. You have full use of the truck for the duration of your lease. These lease payments will usually be tax-deductible. When the lease term ends, you usually have an option to pay an additional amount to buy the truck. Alternatively, you can hand it back to the lender and lease a newer model truck if you want.
A chattel mortgage is another option for financing a new business truck. It involves a lender providing you with a loan that is secured against the vehicle via a mortgage. Chattel mortgage interest and fees on a business vehicle are tax-deductible against business income.
However, it’s important to understand that like any secured loan, the lender can repossess a vehicle under a chattel mortgage arrangement if you default on your regular loan repayments. When you have repaid the loan in full, the lender releases the mortgage.
A hire purchase agreement for a business truck involves you hiring it from the lender for an agreed term. When you make your last hire payment, the ownership of the vehicle transfers to your business.
What is a Residual (Balloon) Payment?
A residual (balloon) payment is a way that you can reduce your truck loan repayments during your finance term, in return for making a single larger (balloon) payment at the end of the term.
For example, if you borrow $100,000 for a new truck via a five-year chattel mortgage, you could arrange to pay $80,000 over five years with regular monthly repayments, and a single $20,000 residual (balloon payment) at the end of the five-year term.
However, if you structure your repayments like this, it’s important that you structure your business finances to ensure that you can afford the final residual (balloon) payment amount.