Chattel Mortgage

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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.

Table of contents
  • 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 loans. 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 payment. 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: -

  • 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

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Example

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 term of the loan was five 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 the case of default payments, the lender will have the right to sell the equipment and cover all the losses due to payment default.
  • The interest rate will be lower than the unsecured loan.

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

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Purpose of Chattel Mortgage

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

Types

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

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

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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.