What Is a Chattel Mortgage?

Chattel mortgage is a legal term used to describe a loan arrangement in which an item of movable personal property acts as security for a loan. The movable property, or chattel, guarantees the loan, and the lender holds an interest in it.

This differs from a conventional mortgage in which the loan is secured by a lien on real, stationary property.

Chattel mortgages are referred to as security agreements in some areas of the country. The terms "personal property security," "lien on personal property," or even "movable hypothec" are also synonyms for chattel mortgage used in different jurisdictions around the world.

Understanding Chattel Mortgages

Vehicles, airplanes, boats, farm equipment, and manufactured homes are all good examples of assets that are often financed using chattel mortgages.

These mortgages must be registered in a public registry so third parties can be aware of them before entering into financing agreements with potential borrowers who want to put the property up as security for another loan. Security agreements associated with aircraft should also be recorded with the Aircraft Registration Branch of the Federal Aviation Administration.

These loans typically carry higher interest rates than traditional mortgages, and they come with shorter terms.

[Important: A lender has conditional ownership of the chattel property under a chattel mortgage.]

Chattel Mortgage vs. Traditional Mortgage

A chattel mortgage differs from a traditional mortgage in that the lender can take possession of the property that serves as security when a traditional loan is in default. The legal relationship is reversed with a chattel mortgage. The lender does not hold a lien against the movable property—the chattel. Instead, ownership of the chattel conditionally transfers to him until the loan has been satisfied. The borrower resumes full control and ownership of the chattel at that point.

Key Takeaways

  • The movable property, or chattel, guarantees the loan, and the lender holds an ownership interest in it.
  • Chattel mortgages are frequently used to finance mobile homes that are situated on leased land, as well as certain types of business equipment.
  • These loans typically come with higher interest rates than traditional mortgages.

Types of Chattel Mortgages

Chattel mortgages are frequently used to finance mobile homes that are situated on leased land. A traditional mortgage can't be used because the land doesn't belong to the owner of the mobile home. Instead, the mobile home is considered "personal movable property," and it can be the subject of a chattel mortgage, serving as security for the loan. The financing arrangement remains valid even if the mobile home is moved to a different location.

Businesses frequently use chattel mortgages to purchase new equipment. Heavy machinery has a long lifespan and its purchase can be financed over a period of time by the seller, but the seller will want to keep a security interest in the machinery in the event of default. A chattel mortgage allows the buyer to use the equipment while maintaining a safe position for the seller at the same time. The seller can recover the equipment and sell it to recover losses from the loan balance in the event that the buyer defaults.