What is a chattel mortgage and how does it work for car loans?

Banks and other financial institutions play a vital role in every county’s economy as they provide loans to individuals and businesses to help them realize their goals, whether personal or business. But, as we all know, they are for-profit businesses since they have investors and/or depositors who are aiming for a return and/or capital appreciation. They must also safeguard the loans they have provided, particularly those that are extremely lucrative, such as auto loans. With that in mind, they create a solution that protects both parties' interests, which they call a "mortgage."

What is a mortgage?

Generally, [a] mortgage is a legal agreement between two parties, the creditor and the debtor, in which the former lends money to the latter for the purpose of purchasing a tangible property.

In this agreement, the property is used as collateral for the loan if the debtor fails to pay the agreed-upon terms, which are usually monthly over several years. While the lender doesn't own the property in this scenario per se, it typically reserves the right to seize the property if the debtor defaults on the loan. However, upon full payment, ownership of the property becomes the sole right of the debtor.

What are the types of mortgages?

There are two types of mortgages: (1) traditional mortgage, and (2) chattel mortgage. A chattel mortgage is distinct from a traditional mortgage in that the lender retains ownership of the property until it is paid off. The lender isn't the owner of the property with a traditional mortgage, but they do have a lien on it that allows them to take possession in the case of a default. Ownership of the property passes to the buyer at the end of the mortgage term, if all payments have been made.

How does a chattel mortgage for auto loans work?

Chattel mortgages are very common in the Philippines, especially for businesses to purchase new equipment, such as vehicles. Because vehicles have a long lifespan, the bank can spread the loan over a longer period of time, making the payments more affordable for the buyer. Should the loan be defaulted on, the bank retains ownership of the cars at all times. The buyer can utilize the vehicle as if it were their own when using a Chattel Mortgage. In the unlikely event that the buyer defaults on the loan, the bank can repossess the vehicle and sell it to recover their losses.

Choosing a chattel mortgage is a significant commitment that should be carefully considered. It can be a viable approach to acquire if well planned and executed. While there are more requirements and steps than with a regular cash purchase, this does not appear to deter many people, as indicated by the large number of car buyers who have secured auto loans in recent years.