Chattel Mortgage Meaning Examples How It Works

Chattel Mortgage Meaning

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 score.read 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 installments.read 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: –

Pay the residual amount and take ownership of the movable property.Trade in the movable property and start a new loan from the proceeds.RefinanceRefinanceRefinancing is defined as taking a new debt obligation in exchange for an ongoing debt obligation. In other words, it is merely an act of replacing an ongoing debt obligation with a further debt obligation concerning specific terms and conditions like interest rates tenure.read more to pay the residual value of the loan.

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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 Default Of PaymentsDebt default refers to a situation in which a borrower fails to repay loans, causing the borrower’s reputation to suffer. However, before the debt is declared a default, a notice is sent to the borrower stating the debt’s position and the lender’s intention to declare it a default in the event of non-repayment of the debt.read more, 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 loanUnsecured LoanAn unsecured loan is a loan extended without the need for any collateral. It is supported by a borrower’s strong creditworthiness and economic stabilityread more.

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

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 Short-term FinanceShort-term financing refers to financing a business for less than a year in order to generate cash for working and operating expenses, usually for a smaller amount. It include obtaining funds through online loans, credit lines, and invoice financing.read more.

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 ratesVariable Interest RatesVariable interest rate refers to a mortgage or loan interest rate that fluctuates with the market conditions. The interest levied on variable loans depends on the reference or benchmark rate—an index.
read more, 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 Asset In The Accounting Assets in accounting refer to the organization’s resources that hold specific economic value and facilitate business operations, meet expenses, and generate cash flow. They create the company’s worth and are recorded in the balance sheet.read more balance sheet.Borrowers can also avail themselves of tax benefitsTax BenefitsTax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place.read more.