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The vast majority of equipment is financed via a chattel mortgage. As the name implies, the equipment loan is secured by a chattel (car, dump truck, front end loader) as opposed to real estate.
It is common for the lender to lend 100% of the purchase price of the equipment. If the equipment is specialised in any way, or the equipment is dated, or if the lender has any concerns regarding the borrower, they may seek a sizeable deposit as opposed to lending to 100% of the purchase price.
Generally the term of an equipment loan is 5 years, and sometimes 7 years. Utilising a final balloon payment of up to 50% of the equipment purchase price may be implemented to minimise repayments during the loan term.
This is only practical if the lifespan of the equipment is more than 5 years.
The borrower has the option of paying the final balloon payment (which would be sizeable), or refinancing the balloon amount over another term of approximately 2-3 years.
Equipment Finance loans do not have the ‘bells and whistles’ associated with home loans, i.e. 100% offset and redraw.
Other types of equipment finance include:
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