What is a Chattel Mortgage? - Definition & Example

Instructor: Janice Bailey

Janice has taught reading, writing, Microsoft Office 2010, Visio, Project Management. Her Masters of Science is in Applied Criminology with a Business Emphasis

So you want to buy a car but don't have the money? A secured transaction will help you with this goal, but what will you be required to give in return? A chattel mortgage will spell out the terms!

A Simple Loan

Many of us know there were times as children we 'borrowed' a toy or personal item from a friend, this was considered a loan. Yet, what would it have been like if one time you asked your friend Johnny to borrow his PlayStation, but instead of just loaning it to you, he told you he wanted 'security' for this loan. In order to make sure it gets returned, he wanted you to back the loan with a personal item such as your baseball card collection. That way, if for any reason you could not return his PlayStation or return it to him in the condition it was received, he would have something to replace the value of his PlayStation.

This would be a simplified example of a secured transaction.

A Type of Secured Transaction

A secured transaction is a type of loan, but instead of a 'creditor' or 'lender' (financial institution giving you the loan) just handing over the funds you want, the 'obligor', 'borrower' or 'debtor' (person wanting the loan) must secure that transaction before the loan is given.

Chattel mortgages are one of the most common types of secured transactions. Usually the type of property used to secure the loan is considered as movable property or 'chattel'. Examples of property used could be a boat, home fixtures, jewelry, electronics, and paper property such as stocks, bonds, or a car title. Property used for security usually falls within the categories of farm products, personal property, consumer goods, inventory, equipment and property on paper. Movable property is the opposite of sedentary property, examples would be land or permanent buildings.

Household Goods
Household Goods

Almost anyone can secure a chattel mortgage in order to borrow money for a purchase. There are many financial institutions that are willing to help you do that; you just need to choose one. Your local bank or credit union may be a good place to start. Whatever institution you choose there will be some formalities involved, starting with an agreement or 'contract' between the two parties to spell out the requirements on both sides. The contract must be in writing and must be signed by both parties.

In this day and age, some financial institutions also provide a means to 'e-sign' a document, so the final paperwork can be signed over the Internet through a secure website. The contract must include all the specifications of the loan, including what one party will do for the other party or the 'value' of the loan, a description of the 'chattel' that is given as security for the loan, what will happen if the contract is broken by either party, and current contact information.

The government also has a code that helps to define secure transactions under the Uniform Commercial Code, Article 9 (UCC). The government also keeps track of these types of contracts in order to prove their existence. This gives validity to the agreement, along with each state having its own rules and regulations regarding them.

Uncle Sam
Uncle Sam


Securing a loan with movable goods has an advantage for the lender as the property is easily located, obtained and then sold to pay off the loan. Along with the interest on the loan that's been incurred (a finance charge for lending the money), the lender obtains good value for making the loan. When the contract was made, the property used as security for the loan should have enough worth to pay off the balance, along with any fees incurred in case the borrower broke the contract or 'defaulted'.

Obtaining a chattel mortgage is also an advantage for the debtor as he or she can usually secure the loan with property that is not crucial to their everyday life, like video game equipment or jewelry as opposed to a laptop with personal files or camera equipment if the borrower is a photographer. The debtor usually has a wide range of choices in what to secure the debt with, and the conditions of the loan are tailored to the circumstances of the 'debtor' and the requirements of the 'lender'.

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