What Is It?
A chattel mortgage is a loan that uses the borrower’s personal possessions as security. Personal possessions that can be used as security in such a loan include cars, boats, machinery, real estate, and even homes or mobile homes. The personal possession or asset becomes security for the loan because a public lien is put on the possession by the lender, once the borrower enters the loan contract and receives the amount of the loan. This means the borrower is not at liberty to sell off the personal possession that’s been designated as security for the loan, even though they hold legal ownership of it. The lender also has the right to reclaim the personal possession back from the borrower under specific circumstances, such as when there is a failure to pay back the loan.
How It’s Used
Chattel mortgages are a popular means of financing car or equipment purchases. The amount of the loan allows the borrower to purchase the asset, and loan terms should give the borrower time to gradually pay off the price of the asset to the lender. Because of this, it’s quite popular among businesses to take out such a loan to invest in new assets. Chattel mortgages allow an individual or business to acquire an asset even if they don’t have the purchase price on hand as cash. Instead, they can spread out payment of the asset in installments over a set period – which also includes interest payments to the lender – while being able to purchase and use the asset immediately.
One of the characteristics of this type of mortgage that makes it especially appealing is its low-interest rates. Most chattel mortgages offer lower rates than those available on most other types of loans. This is especially true of unsecured loans, that don’t offer any assets or personal possessions as security to the lender in the case of a failure to make payments. Unsecured loans typically have much higher interest costs. However, when comparing it as an option to other types of secured loans, its best to carefully compare the rates being offered.
Chattel mortgages are generally set up on a fairly straightforward payment plan that allows the borrower several options when it comes to making payments. These include flexible repayment periods, reducing monthly payments by including final balance payment, fixed interest rates, fixed payments, or payments aligned with the borrower’s cash flow. The flexibility afforded by most lenders of chattel mortgages means you can choose a repayment plan that matches the type of purchase being made and the circumstances of the borrower. Other things to consider are the processing fees, which are usually lower for chattel mortgages.
Another big plus when it comes to chattel mortgages is that there’s often the option of claiming tax deductions as the borrower. Since the personal possession being used as security is for business purposes, there’s usually the opportunity to claim a tax deduction on loan interest charges, as well as on the depreciating value of the asset.
Who Is It Suitable For?
Chattel mortgages are most suited for businesses, but they can also be a good option for individuals who need to use an asset for business purposes. Something to keep in mind is that you need to carefully read the terms and conditions of the loan before signing on the dotted line. The best option is to consult with an accountant when making a decision whether to use a mortgage offered by a specific source.
Another thing to consider is that these loans are usually better suited to smaller loans. The nature of chattel mortgages means there’s a ceiling to how much lenders are willing to sign off on. If you’re considering purchasing an asset that’s much more expensive than a car, other types of loans might be a better option.
Should You Get One?
If you need an asset for use in a business setting, chattel mortgages are a good option whether you’re a company manager, part of a partnership, a sole proprietor, or an employee. They provide good options for purchasing an asset with a substantial price tag, without the requirement of paying the price in full at the time of purchase. If you choose your lender wisely, they can be a great way to obtain a business asset.
About the Author:
Ray is a sought-after thought leader and an expert in financial and money management. He has been published and featured in over 50 leading sites and aims to contribute articles to help novice financial planners. One of his goals is to impart his knowledge in finance to educate and help ordinary people create and achieve their financial goals.