WHAT IS A CHATTEL MORTGAGE AND WHEN WOULD YOU USE ONE? ​

Investopedia describes this type of loan as one that is used to purchase a movable object that is secured with a loan. By movable object, it means a mobile home, manufactured home, or a piece of heavy equipment. Whichever item you are using the loan to acquire will be what is used for the loan.

To make things a little clearer we can use a simple example. Let’s say that you want to purchase a mobile home that is sitting in a trailer park. Since the home is sitting on land that you do not own it is a piece of “personal movable property”. The lender gives you a loan, with a lien on the mobile home, that will be released once the loan, and interest, have been paid off. The big difference when it comes to this type of loan is that the lender owns the home until it is paid off. If you go into default with payments, the lender will simply sell the home off to pay for the remainder of the loan.

Another example would be if you owned a large farm and wanted to buy a new tractor to help you work the land. The tractor will be used as the lien on the loan. Until it is paid off the lender would own the piece of heavy equipment and could sell it to gain their money back if you were unable to pay the loan off, for any reason.

A chattel mortgage is used to allow people to purchase items that would normally be out of their financial reach. They can also be used to secure business equipment that is expensive, allowing the company to retain most of its cash to continue doing business effectively. Either way, the loan will have a shorter term than an original mortgage would have. They are usually set up for a maximum of twenty years, compared to the thirty-year mortgages on a basic home or property loan.

This loan will have a much higher interest rate attached to it because it is a higher risk for the lender. The interest is usually tax-deductible, though, so at the end of the year you will get some of the amount back in tax breaks. The backside to that is that overall, with this type of loan, you pay more for the item that you are leasing than if you were to get a basic loan and pay it off.

Payments made to the lender can be set up in a couple of different ways. You can get a fixed amount that will continue through the entire length of the contract. You may also set them up in such a way that it is based on your specific amount of cash flow. This could help if you own a business or farm, that is based on earning money during certain seasons.

A chattel type of loan will give you a chance to have a mortgage with a lender to purchase a movable home, or piece of heavy equipment when you can not pay for the item outright. It is beneficial when a normal loan cannot be obtained. It may have higher rates of interest, but with the shorter terms the mobile home, or equipment, will be paid off faster so you can take possession of it quickly.

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