Equipment finance basics and balloons

Most tractors, utes and big machines are bought with equipment finance. The machine is usually the security, which means the lender can take it and sell it if you don't pay. That's why you often don't need to offer land.

The main types

They mostly differ in who owns the machine during the contract.

• Chattel mortgage: a chattel is a movable item, like a tractor. You buy it and own it from day one. The lender takes a mortgage over it as security.
• Hire purchase: the lender owns the machine while you pay it off. You own it after the last payment.
• Finance lease: the lender owns the machine and leases it to you. What happens at the end depends on the contract.

Each type has different GST and tax treatment. Ask your accountant before you sign. Our equipment finance guide explains them in more detail.

Balloons

A balloon, also called a residual, is a lump sum left owing at the end of the contract. It lowers the regular repayments, because you aren't paying off the whole price during the term.

Moneysmart warns that you repay the lump sum with interest, so the total cost is generally higher. It says to be confident you'll have the money when it falls due. A balloon is fine if you've planned for it. It hurts when it falls due in a poor year.

Match the term to the machine

The GRDC says the loan should line up with the machine's useful life, and that contracts longer than 60 months are unusual. Repayments should finish before the machine is worn out. The danger is a balloon on a machine that is worn out by the time it falls due.

What to compare between quotes

1. The interest rate, and whether it's fixed.
2. Fees, such as establishment, broker or dealer fees, and monthly fees.
3. The balloon, if any.
4. The cost of paying out early.
5. The total of all repayments, the balloon and fees. That one number makes quotes easy to compare.

Buying second-hand

Search the PPSR (Personal Property Securities Register) before buying used gear privately. It shows whether the machine still has finance owing on it.

Our equipment finance repayments calculator shows the repayments with and without a balloon.