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Which offer is actually cheaper?
You cannot tell from the rates, and that is not a figure of speech. A deposit is money handed over today, when it is worth most. A balloon is money handed over in five years, when it is worth considerably less. Two offers with different rates regularly land the opposite way round from what the rates suggest.
Compare finance offers
Worked from figures entered by the reader. Indicative only, and not advice of any kind.
Chattel mortgage costs $1,477 less in today's money.
And it carries the higher advertised rate, 8.5% against 7.9%. A deposit paid today and a balloon paid in years are worth very different amounts, and the rate captures neither. This is why comparing offers on rate alone regularly picks the wrong one.
| Figure | Chattel mortgage, the cheaper option | Finance lease |
|---|---|---|
| Advertised rate | 8.5% | 7.9% |
| Paid up front | $495 | $45,500 |
| Amount financed | $220,000 | $176,000 |
| Each month | $3,775 | $3,560 |
| Balloon at the end | $55,000 | $0 |
| Total paid | $281,984 | $259,114 |
| Cost in today's money | $211,586 | $213,063 |
If your money is worth more, or less
The answer changes across this band, which means it rests on the assumption rather than on the offers.
| Discount rate | Chattel mortgage | Finance lease |
|---|---|---|
| 8% | $223,579 | $221,085, cheaper at this rate |
| 10% | $211,586, cheaper at this rate | $213,063 |
| 12% | $200,467, cheaper at this rate | $205,550 |
- The cheaper option here carries the higher advertised rate. That is not a trick of the arithmetic: a deposit paid today, fees paid today and a balloon paid in four years are worth very different amounts, and the rate captures none of that. It is why comparing offers on rate alone regularly picks the wrong one.
- The answer changes across the discount rate band, which means the two offers are close enough that the result depends on an assumption rather than on the offers. Treat them as line, and decide on the terms that are not money: flexibility, security, what happens if you want out early.
- A balloon lowers the present cost because the money is paid later, and it leaves a sum owing against an asset that may be worth less than it by then. That risk is real and it is not in these figures.
Illustrative only, and not tax or financial advice. It uses a discount rate you chose and takes no account of tax, depreciation or GST timing, which in practice often decide which structure is better. Your accountant can tell you what those are worth in your situation and what discount rate suits your business.
The method
Every dollar, moved back to today.
Present value is not complicated. It just asks what a payment in month forty is worth now, and then adds all of them up. What makes it useful is that it holds timing, deposits, fees and balloons in one number, which a rate cannot.
| Element | How it is treated | Why it matters |
|---|---|---|
| The deposit | It reduces what you finance, and it is counted once, at the start. | Counting it twice is a genuine and common modelling error, and it overstates whichever option carries the deposit by tens of thousands. |
| The payments | Worked from what is actually financed, at that offer's rate, over that offer's term. | Recomputed rather than taken from the quote, so the two are compared on the same basis. |
| The balloon | Discounted back from the final month. | Money paid in five years is worth considerably less than money paid today, which is the whole reason a balloon can win. |
| The discount rate | Whatever you enter, and shown again two points either side of it. | We will not choose it for you. It is your cost of capital, and the band shows how much the choice actually changes the answer. |
The deposit
- How it is treated
- It reduces what you finance, and it is counted once, at the start.
- Why it matters
- Counting it twice is a genuine and common modelling error, and it overstates whichever option carries the deposit by tens of thousands.
The payments
- How it is treated
- Worked from what is actually financed, at that offer's rate, over that offer's term.
- Why it matters
- Recomputed rather than taken from the quote, so the two are compared on the same basis.
The balloon
- How it is treated
- Discounted back from the final month.
- Why it matters
- Money paid in five years is worth considerably less than money paid today, which is the whole reason a balloon can win.
The discount rate
- How it is treated
- Whatever you enter, and shown again two points either side of it.
- Why it matters
- We will not choose it for you. It is your cost of capital, and the band shows how much the choice actually changes the answer.
A worked example
8.5% beats 7.9%.
The same $220,000 asset, two offers over 60 months. One at 8.5% wanting nothing up front. One at 7.9% wanting $44,000 on the day.
Chattel mortgage costs $1,477 less in today's money.
And it carries the higher advertised rate, 8.5% against 7.9%. A deposit paid today and a balloon paid in years are worth very different amounts, and the rate captures neither. This is why comparing offers on rate alone regularly picks the wrong one.
| Figure | Chattel mortgage, the cheaper option | Finance lease |
|---|---|---|
| Advertised rate | 8.5% | 7.9% |
| Paid up front | $495 | $45,500 |
| Amount financed | $220,000 | $176,000 |
| Each month | $3,775 | $3,560 |
| Balloon at the end | $55,000 | $0 |
| Total paid | $281,984 | $259,114 |
| Cost in today's money | $211,586 | $213,063 |
If your money is worth more, or less
The answer changes across this band, which means it rests on the assumption rather than on the offers.
| Discount rate | Chattel mortgage | Finance lease |
|---|---|---|
| 8% | $223,579 | $221,085, cheaper at this rate |
| 10% | $211,586, cheaper at this rate | $213,063 |
| 12% | $200,467, cheaper at this rate | $205,550 |
And then it flips
At the lower end of that band the other offer wins. That is not a flaw in the arithmetic, it is the honest answer: these two are close enough that the result depends on what your money is worth to you.
Which is exactly why a single confident number would be the worse tool. When the band disagrees with itself, decide on the things that are not money.
What this does not cover
- Tax, depreciation entitlement and GST timing, which often decide this in practice
- Break costs or what it takes to exit either facility early
- Security, guarantees, and what each financier would want over the business
- Different terms, which the tool refuses to compare rather than faking an answer
- Whether either offer would actually be approved
It is not only which one is cheaper.
What a structure does to your covenants, your security and your capacity to borrow again matters as much as the cost. The Debt Capacity Assessment models all of it from your actual financials. $1,850, 5 business days.
Want the finance arranged as well?
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Common questions
Because a rate only prices the money you borrow, and an offer is made of more than that. A deposit is money you hand over today, when it is worth the most. A balloon is money you hand over in five years, when it is worth considerably less. Fees are paid up front. Two offers with the same rate and different structures cost different amounts, and two offers with different rates can land the other way round from what the rates suggest. Present value is the only comparison that holds all of it at once.
We will not tell you, and that is deliberate rather than coy. The right rate is your own cost of capital, which depends on your position and your alternatives, and choosing it for you would be financial advice we are not licensed to give. Your accountant can help you set it. What we can do is show you how much it matters, which is what the sensitivity band underneath the answer is for.
Because the rate decides how much you care about timing. At a low rate, money in five years is nearly as valuable as money today, so an offer that defers payment gains little. At a high rate, deferring is worth a lot. When the answer flips inside the band, that is telling you the two offers are genuinely close and the decision should turn on something other than cost: flexibility, security, or what happens if you want out early.
Because depreciation entitlement and GST timing are usually what actually decides between these structures, and working out what they are worth in your situation is tax advice. Andorra Advisory Group does not provide taxation services. Take this comparison to your accountant and ask them to layer the tax treatment over it. The answer can change once they do.
Because that comparison does not mean anything. A three-year facility costing less than a five-year one tells you that three years of payments are cheaper than five, which you already knew. To compare properly, set both to the same term, or work out what each costs per year of use and compare those.
General information only. Not credit advice, not a credit assessment, not taxation advice, and not an offer of finance. Andorra Advisory Group does not arrange credit and is not a credit representative.