What is a chattel mortgage?

A chattel mortgage is a loan in which a movable personal property is used as security. The term has slightly different meanings across the world.

For example, in Australia it simply refers to a car loan, in which the lender owns the vehicle until the borrower has fully paid off the loan.

If you require leverage for a loan, there are other options apart from putting your house on the line. Other freestanding possessions may also be used, and that is where a chattel mortgage is a useful option.

Chattel (both a countable and uncountable noun) is an item of property other than freehold land, such as cattle, vehicles, boats, trailers, electronic appliances, leases, and even clothes.

Chattel MortgageJohn needed a loan to extend his shop. Instead of using his freehold property, he decided to put up his sports car as security on the loan.

With a chattel mortgage, which is sometimes referred to as a secured transaction, the one lending the money holds a lien against the chattel (the movable property) until the debt is paid off in full, at which point the borrower assumes ownership.

According to realtor.com, a chattel mortgage is:

“A loan that can be obtained from a bank or financial institution using some sort of movable personal property – possessions other than land, buildings or any permanent fixture – as security.”

To be considered as chattel, the item must not cause any damage or change to a freehold real estate property, such as land or a building the borrower owns.

Chattel mortgages are commonly used by businesses as a way of accessing funds. This type of loan is used by companies to buy additional property – they use their machinery and vehicles as collateral.

Chattel mortgages convenient for lenders

Lenders like chattel mortgages, because if the borrower defaults they can seize the movable security and sell it rapidly.

Experts advise potential borrowers to select a movable possession that is not vital for their everyday life when considering what to put up as security. For example, a laptop full of personal files might not be a good idea.

Video – Chattel mortgage vs. car leasing

In this Australian video, where a chattel mortgage tends to mean just a car loan, the speaker talks about the pros and cons of a chattel mortgage versus leasing.