Chattel Mortgage

Updated on March 19, 2024
Article byNiti Gupta
Edited byNiti Gupta
Reviewed byDheeraj Vaidya, CFA, FRM

Chattel Mortgage Meaning

A chattel mortgage is a loan given to individuals and companies with the movable property collateral against the loan. Such loans include cars, airplanes, boats, farm equipment, and even mobile homes on leased land.

Key Takeaways

  • A chattel mortgage is a type of loan that uses movable property as collateral, such as cars, planes, boats, and farm equipment. 
  • There are two main types of chattel mortgages: those for financing mobile homes and those for financing new equipment. 
  • The purpose of a chattel mortgage is to quickly obtain a loan, even with a bad credit history, finance a new project, or borrow money by using movable property to pay off debts. It is also a good source of short-term financing.

How does Chattel Mortgage Work?

The chattel mortgage loans are very much similar to commercial loansCommercial LoansCommercial loans are short-term loans used to raise a company's working capital and meet heavy expenses and operational costs. It is a kind of financing often used by small companies that cannot afford to raise money from equity markets and bonds. Banks and well-established financial institutions often provide commercial loans against the debtor's financial statements and credit more. However, the borrower can choose the term of the payments and the payment frequency. The only difference is that the movable property secures the chattel mortgage.

Another feature is that the borrower can go for residual or balloon paymentBalloon PaymentThe balloon payment is a huge sum paid at the end of a loan tenure. Most balloon loans come with a short-term tenure; it could be a commercial loan, mortgage, or fully amortized loan. Also, the final installment is at least double the previous more. Residual 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: –

Chattel Mortgage

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

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

Purpose of Chattel Mortgage


There are primarily two types:

  • Chattel Mortgage for Financing Mobile Homes: This type of mortgage is extended to the borrowers of mobile homes situated on leased lands. The borrowers purchasing mobile homes cannot go for a traditional mortgage because the land does not belong to the borrower. Since a mobile home is considered movable property thus, it comes under its purview.
  • Chattel Mortgage for Financing a New Equipment: This financing is used to purchase new equipment that allows the borrower to keep using the equipment or machinery while providing it as collateral. If the 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:  The property must be transferred to the creditor or lender before starting the loan. The lenders prefer this. Fees associated with this type of mortgage are quite high.
  • A chattel mortgage without dispossession:  The borrowers do not need to transfer the collateral property to the lender before the start of the loan. This type of mortgage specifically mentions the amount covered by the guarantee or security. The amount covered by the warranty 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 covers the fees and interest over the loan.

Benefits of Chattel Mortgages

Frequently Asked Questions (FAQs)

1. What is the chattel mortgage vs. novated lease?

A chattel mortgage is a loan provided by a lender to purchase a vehicle, where the vehicle is used as security for the loan. A novated lease is an agreement between an employer, employee, and a finance company where the employer agrees to lease a vehicle on behalf of the employee, with the employee making the lease payments from their pre-tax income.

2. What is a chattel mortgage with an affidavit of good faith?

A chattel mortgage with an affidavit of good faith is a type of financing where the borrower provides a sworn statement that the information provided on the mortgage application is true and accurate to the best of their knowledge. This affidavit of good faith is a legal document and is used to confirm the accuracy of the information provided by the borrower.

3. What is the difference between chattel mortgage and hypothecation?

A chattel mortgage is a type of security interest where the lender holds a mortgage over a movable asset (chattel), such as a vehicle or equipment, as security for the loan. Hypothecation, on the other hand, is a type of security interest where the lender has a charge over an immovable asset, such as a house or land. 

Recommended Articles

This article is a guide to Chattel Mortgage Meaning. Here we discuss the chattel mortgage example, how it works, its purpose, types, and benefits. You may learn more about financing from the following articles: –