In this post, we are going to take a look at a niche, and often overlooked form of financing – the Chattel Mortgage. While Chattel Mortgages are limited in their suitability they nevertheless form an essential part of the lending canon when it comes to certain asset classes – let’s get started.
What Is a Chattel Mortgage?
Put simply, a Chattel Mortgage is a mortgage that is secured over a moveable asset (or chattel) such as a manufactured (i.e. prefab) home, a high-value vehicle such as a plane or boat, or a piece of construction equipment.
How Does a Chattel Mortgage Work?
There are some crucial differences between a regular mortgage and a chattel mortgage which we will now examine. A regular mortgage is taken as security for land and more often than not a property built upon it. When a borrower obtains a regular mortgage, they still own the land and property and the mortgage is secured by way of a lien or charge at the land register. The mortgagee can obtain possession of the property in the event of a default and sell it to repay the loan.
With a chattel mortgage, the loan is secured over a moveable asset rather than land. In the case of a chattel mortgage over a manufactured house or a trailer, the property is used as security but not the land on which it is situated. Additionally, with chattel mortgages, the asset is technically owned in the name of the lender until such a time as the borrower has fully repaid the loan at which point ownership is transferred.
How Does A Chattel Mortgage Compare With Unsecured Financing?
The obvious difference between a chattel mortgage and unsecured financing is that with a chattel mortgage, the lender does have some form of security. In the case of a chattel mortgage over a boat, the lender can repossess the boat and sell it in the case of a default.
With an unsecured loan, the lender has no security for the money and effectively has to take its chances and hope that the borrower fully repays. While an unsecured lender can take legal action against a borrower personally, this is often more expensive than it’s worth.
That said, by their nature, the kind of assets secured under chattel mortgages are not always easy to recover or resell and so it is not a watertight form of security. For this reason, the interest rates of chattel mortgages can be almost as high as with unsecured lending.
How Does A Chattel Mortgage Compare With Secured Financing?
There are some striking similarities between a chattel mortgage and some secured loans and in some ways, a chattel mortgage could even be viewed as a form of secured loan. For example, vehicles can sometimes be offered as security or collateral for loans such as in the case of car leases – if the borrower defaults, then the lender can take the car and sell it to repay the debt
However, it is less common for lenders to offer secured loans over assets such as boats, planes or pieces of high-value construction equipment. Also, chattel mortgages can sometimes be for very large sums that far exceed the maximum loan amounts offered by secured loan lenders.
A Chattel Mortgage vs Lease
There are some strong similarities between a chattel mortgage and a lease and some consumers do confuse the two. Indeed in both cases, the ownership of the asset is retained by the lender for the duration of the loan repayment period. This can be frustrating for some consumers as they are still usually responsible for maintaining, insuring and generally looking after an asset of which they are not the legal owner.
The main difference, however, is that once a chattel mortgage is repaid, the asset is transferred to the borrower whereas, when the lease expires the lessee simply acquires the right to buy the asset, but still needs to pay over a further sum of cash. Of course, in the case of a vehicle or a piece of equipment, there is a possibility that the asset may have become malfunctioning or even obsolete over the term of the loan and as such may be something of a compromised asset anyway.
Issues regarding legal liability also sometimes come into play here too. Under a chattel mortgage, the borrower sometimes can be held liable as both user and owner in the event that the asset causes injury or death. With a lease, the borrower can only be held liable as the user in the same eventuality.
The other notable difference is that leases are usually offered over more conventional kinds of assets such as cars, as opposed to aeroplanes.
Final Thoughts on Chattel Mortgages
Chattel mortgages are a relatively rare form of credit and most consumers are unaware that the concept even exists. Still, for those looking for finance on planes, cranes or manufactured homes (a growth industry by the way) they can be invaluable.
Of course, the interest rates are high and the ownership situation does bother some prospective borrowers but nevertheless, there is most certainty a place for chattel mortgages in the credit landscape.