What Are Chattel Loans?

When you buy a house, the mortgage for that property is based on the combined value of the land and the building on that land. But not all buildings can be valued with the underlying land. Mobile and manufactured homes can move off the land, making it difficult for banks to assess a traditional mortgage. For cases like this, with movable buildings and other major purchases, banks issue what’s known as a “chattel loan.” Consider working with a financial advisor who can help you map out how a chattel loan might factor into your financial goals.

How Do Property Loans Work?

Property loans can come in many different varieties. The most common types tend to be car loans, where you take a loan to buy a vehicle, and mortgages, where you take a loan to buy real estate. In most, if not all, cases a property loan is what’s known as a “secured loan.” This means that the lender gives you money to buy a specific asset. In exchange, they get an interest in that underlying asset.

Generally, when you get this type of loan and you fail to make payments, the lender can seize the underlying asset and sell it to get their money back. For example, if you take out a mortgage to buy a house and default on the loan, the lender can sell that house to recover the unpaid balance of the mortgage.

However, a forced sale doesn’t automatically resolve the underlying loan. For example, say that a homeowner defaults on their mortgage, leading the bank to seize and sell their house. If the bank sells the house for more than the remaining balance on the mortgage, the homeowner will receive the overage. However, as is more often the case, if the bank sells the house for less than the remaining balance on the mortgage, the homeowner still owes the rest of the debt.

For this reason, before lenders extend a property loan they assess the value of the underlying asset. They don’t want to give you more money than the asset is worth in case they have to sell it since it’s difficult to collect from someone already in default.

A chattel loan, otherwise known as a chattel mortgage, is a form of secured property loan that applies only to movable assets. As with all loans in this category, the lender receives an interest in the underlying property (or “chattel”). If the borrower defaults on their loan, the lender can seize and sell the chattel as payment. Most chattel loans are business loans. Usually, when individual consumers take out a property loan they use separate, established forms of lending.

The exception to this is with real estate. Both companies and individuals frequently use chattel loans to buy real estate when the property involves mobile homes, manufactured homes or other movable structures. The reason for this is based on how lenders assess a secured property loan.

When you assess the value of any real estate, you do so based on the value of the land and all buildings that sit on it. This works when the structure is built into the property, such as a home with a foundation. When buildings aren’t built into the property, however, it creates a problem. A lender can’t assess the value of real estate based on the attached structures because those structures can be removed at will.

In these cases, the bank can issue you two loans. First, it will give you a loan to buy the underlying real estate. This will be based just on the value of the land itself. Second, the bank will give you a chattel loan to buy the property on top of it. For individual consumers, this is the most common form of a chattel loan.

Types of Chattel Loans

Chattel mortgages are primarily used for large structures or types of equipment that are, at present time, important to the land that the mortgage is for. However, these pieces of property can be moved and taken from the land so a special mortgage is needed to secure the full purchase price. Here are the two most common types of chattel mortgages:

Mobile or Manufactured Home Loans: A chattel loan is often used to finance a mobile, or manufactured, home that sits on a piece of land that is being purchased. The traditional mortgage can’t be used because either the land doesn’t belong to the homeowner or the homeowner can move the home off of the land. This way, the home can be financed regardless of where it physically is located at any given time.
Equipment Loans: A chattel mortgage can be used to finance large equipment, such as a tractor for a farm. This is typically done to finance the equipment you may need for the land or as part of a larger purchase of property along with the land. The chattel mortgage can be used to finance either new or used equipment but the value of the property is still the most important financing factor.

Chattel Loans vs. Consumer Loans

There are three major differences between chattel loans and more consumer-oriented loans, such as a 30-year mortgage or a consumer auto loan. These differences are:

Ownership – With most major types of lending, the borrower owns their property. The lender simply maintains a lien that lets them seize and sell those assets if the borrower doesn’t pay. Chattel loans work in reverse. With a chattel loan, the lender owns the property and the borrower has rights of use and possession. The borrower only actually receives title once the loan is paid off.
Duration – Chattel loans tend to have shorter payment periods than most consumer-oriented loans. They will also frequently have higher interest rates. This means that the monthly payments on a chattel loan are almost always higher than using a different type of lending to buy the same asset.
Consumer Protection Laws – Because chattel loans are generally considered business-oriented lending they come with fewer protections. Most consumer protection laws focus on consumer-oriented lending like traditional mortgages or auto loans.

Bottom Line

Chattel loans are secured property loans that you can use to buy large, movable assets. They are usually used by businesses to make capital purchases, although individuals will often use them to buy mobile and manufactured homes or large farm equipment. If using a chattel loan to make a real estate purchase, you will end up with two different mortgages – one for the land and one for the property.

Tips for Buying Property

Buying any property should probably factor into your overall financial plan. If you’re not sure how the purchase you want to make fits in, or don’t have a plan, you may want to speak with a financial advisor who can help you figure it out. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Whether you’re buying a car, a home or a boat, taking out a major loan is one of the most difficult financial decisions you can make. Our guide to personal lending can help you sort all that out.