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Home » Investment Banking Tutorials » Corporate Finance Tutorials » Chattel Mortgage

Chattel Mortgage

Chattel Mortgage Meaning

A chattel mortgage is a type of loans given to individuals as well as the company with the movable property as the collateral against the loan. Examples of such loans include cars, aeroplanes, boats, farm equipment, and even mobile homes on leased land.

How does Chattel Mortgage Work?

The chattel mortgage loans are very much similar to commercial loans. The borrower can choose the term of the payments, and the frequency of the payment. The only difference is that the chattel mortgage is secured by the movable property.

One more feature is that the borrower can choose to go for residual or balloon payment. Residual payment or balloon payment is a lump-sum amount set aside to be dealt with at the end of the loan term.

The borrowers can choose from the following options to settle the residual payment:

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  • Pay the residual amount and take ownership of the movable property.
  • Trade in the movable property and start a new loan from the proceeds.
  • Refinance to pay the residual value of the loan.

Chattel Mortgage 1

Example

An individual is looking for financing equipment for her business. She goes to the XYZ bank, and the bank offers her the chattel mortgage. The following information was there relating to the loan.

  • The term of the loan was 5 years.
  • The frequency of payment was monthly at the variable rate of interest.
  • The individual borrower can keep using the equipment during the loan term.
  • In case of default of payments, the lender will have the right to sell the equipment and cover all the losses due to payment default.
  • The rate of interest will be lower in comparison to the unsecured loan.

The individual borrower agreed to the terms and went ahead with the mortgage.

Purpose of Chattel Mortgage

  • It is an easy way to obtain a loan than a conventional loan specifically for people with bad credit history.
  • It can be used to finance a new project by the companies or individual entrepreneurs.
  • Individuals can borrow money by offering their vehicles or other movable property as security to clear off their debts.
  • It is an excellent source of short-term finance.

Types

There are primarily of two types –

  • Chattel Mortgage for Financing Mobile Homes: This type of mortgage is extended to the borrowers on the mobile homes situated on leased lands. The borrowers purchasing mobile homes cannot go for a traditional mortgage because land does not belong to the borrower. Since a mobile home is considered movable property, thus, it comes under the purview of it.
  • Chattel Mortgage for Financing a New Equipment: This type of financing is used to purchase new equipment that allows the borrower to keep using the equipment or machinery while providing it as collateral. In the event, buyer or borrower defaults, the lender can sell the machinery to recover the losses.

Chattel Mortgage with or without Dispossession

  • A chattel mortgage with dispossession: Here, the property needs to be transferred to the creditor or lender before the start of the loan. The lenders prefer this. Fees associated with this type of mortgage is quite high.
  • A chattel mortgage without dispossession:  In this, the borrowers do not need to transfer the collateral property to the lender before the start of the loan. In this type of mortgage, the amount covered by the guarantee or security is specifically mentioned. The amount covered by the guarantee is usually lower than the total value of the movable property put as security but higher than the loan. The amount exceeding the loan part is to cover the fees and interest over the loan.

Benefits of Chattel Mortgages

  • The repayment terms are flexible and can be structured, usually between 2 to 5 years.
  • It is provided on fixed as well as variable interest rates, and interest rates are usually lower than the unsecured loans.
  • The ownership of the asset is transferred to the individual or the company at the start of the loan term, so can be shown as an asset in the accounting balance sheet.
  • Borrowers can also avail tax benefits.

Recommended Articles

This has been a guide to Chattel Mortgage and its Meaning. Here we discuss how does it work along with its example, purpose, types and benefits. You may learn more about financing from the following articles –

  • Mortgage Broker
  • Offset Mortgage
  • Mortgage Bond
  • Fixed Rate Mortgage
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