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 is used as security for the loan. The movable property, or chattel, guarantees the loan in this type of mortgage. This differs from a conventional mortgage in which the loan is secured by a lien on real property.
BREAKING DOWN Chattel Mortgage
A chattel mortagage differs from a traditional mortagage. In a traditional mortgage, the lender may take possession of the property that serves as security if the loan is in default. With a chattel mortgage, the legal relationship is reversed and the lender does not hold a lien against the movable property (the chattel). The lender instead has had ownership of the chattel conditionally transferred to him until the loan has been satisfied, at which point the borrower resumes full control and ownership of the chattel.
The expressions "personal property security," "lien on personal property" or even "movable hypothec" are all synonyms of "chattel mortgage" and are used in different jurisdictions around the world. Also, in many jurisdictions, chattel mortgages must be registered in a public registry so that third parties can be aware of them before entering into financing agreements with potential borrowers seeking to put up personal property as security for a loan.
Chattel Mortgages for Mobile Homes
Chattel mortgages are frequently used to help with the financing of a mobile home that is on leased land. Since the land does not belong to the owner of the mobile home, a traditional mortgage cannot be used. Instead, the mobile home is considered "personal movable property" and can be the subject of a chattel mortgage, and can serve as security for the loan. Even if the mobile home is moved to a different location, the financing arrangement can remain valid.
Chattel Mortgages for Businesses
Businesses frequently use chattel mortgages to purchase new equipment that can serve as security for the lender. For example, heavy machinery has a long lifespan and its purchase can be financed over a period of time by the seller, who will want to keep a security interest in the machinery in case of default. A chattel mortgage can be put in place, allowing the buyer to use the equipment, while maintaining a safe position for the seller. In the event of default by the buyer, the seller can recover the equipment and sell it to recover losses from the loan balance.
Vehicles, airplanes and boats are also good examples of assets that are often financed using chattel mortgages.