Chattel mortgages are financing arrangements that allow the debtor to assume ownership of the property purchased using the funds supplied by the lender. In return, the lender takes out a mortgage on the property that serves as security for the loan. Once the loan is repaid in full, the mortgage is removed and the debtor is granted a clear title to the property. The chattel mortgage offers several benefits for both the debtor and the lender, including low fixed interest rates, the ability to claim certain tax benefits, and the potential to arrange the repayment using one or more balloon payments rather than simply following a series of monthly installments.
It is not unusual for a chattel mortgage to be used in financing the purchase of motor vehicles. This is particularly true when the arrangement involves the purchase of cars for use by a business. Depending on the tax laws that apply in the area where the transaction takes place, the buyer can sometimes claim significant tax breaks that help to make the purchase even more cost-effective. Since a chattel mortgage typically includes fixed interest rates that are very competitive and apply for the duration of the mortgage terms, companies can easily project how much of the debt will be retired each annual period.
A chattel mortgage will often allow for the use of at least one balloon payment during the course of the loan. In some cases, that larger payment is scheduled to take place at the end of the loan term. At other times, the arrangements may allow for one or two balloon payments during each year of the mortgage terms. The terms can also allow for lower monthly payments that include an annual balloon payment, an arrangement that is ideal for companies that experience seasonal highs and lows in cash flow.
Along with the advantages that a chattel mortgage offers to buyers, lenders also benefit from the use of this particular lending model. The presence of the mortgage as part of the secured transaction helps to reduce the degree of risk that must be assumed in order to do business with the buyer. The terms can be structured so that they meet the needs of the lender as well as those of the buyer. As with the debtor, the lender can easily project when payments of any type will be remitted and plan accordingly, making it easier to arrange the receipt of those payments in a manner that allows the lender to manage his or her tax obligation with greater efficiency.
