Chattel Mortgage explained: A smart option for auto loan

Say, you want to purchase a car and have even decided on the make, model, and colour. Until this point you are pretty sorted, however, the issue occurs from the very next step, i.e., buying. To get the car home, you’ll need to make payment to the authorized dealer which would meet the requirement for adequate finances.

Paying fully in cash or financing the car is a debate for another day, here we’ll assume most of you do not have excess cash lying around to seal the deal and so will opt for the financing path. Financial institutions in the Philippines offer several types of auto loans and chattel mortgage is one of them. It is regarded as one of the most common and utilized auto loans in the country and we are here to discuss it in detail. As a bonus, we’ll be also talking about car registration of vehicles with a chattel mortgage, and filling for annotation & cancellation of the mortgage.

So, come and get to know all about chattel mortgages & more.

Understanding chattel mortgage

The term chattel mortgage consists of two words: chattel and mortgage. While the former refers to movable property like cars, mobile homes, and even heavy-duty machinery, the latter is a legal loan agreement between the lender (the creditor) and the borrower (the debtor), where the former lends money to the latter to purchase a physical property.

So, Chattel Mortgage is a loan taken for purchasing a movable property, and like in the case of every other mortgage, the property (in this case cars, automobiles) serves as collateral, if the borrower fails to settle the debt. While the lender is not the property owner, the agreement reverses the right to seize the property if the borrower defaults on the loan (fails to pay the balance and interest over time). However, if the debtor fully pays off the loan, he/she holds the ownership, the sole right over the property.

Also Read: Car loan scams in the Philippines: Applicants be aware

Chattel mortgage vs. Regular mortgage

For better understanding, let us compare chattel and regular mortgages side-by-side on different parameters.

Parameters	Chattel Mortgage	Regular Mortgage
Property	It is secured for movable property, like vehicles, mobile homes, etc.	It is secured for fixed property, like land, houses, etc.
Ownership	The lender typically owns the movable property until the loan is paid.	The lender holds a lien on the property.
Interest rates	Higher interest rates compared to regular mortgages.	Low interest rate compared to a chattel mortgage.
Loan terms	Shorter loan term compared to regular mortgages.	The loan term is slightly on the higher side.
Foreclosure	The foreclosure process is not complex.	It is a bit lengthy and involves the country’s court system.
Cost	Expensive	Comparatively more affordable

 

Chattel mortgage: Specific regulations

In the Philippines, there are specific regulations about chattel mortgages. The list includes -

• Registration of the approved auto loan at the Registry of Deeds office
• Cancellation of mortgage post the full payment of the loan at the Registry of Deeds
• Filing for annotation and cancellation of Chattel Mortgage at the LTO
• Changing the registration status of the vehicle at the originating LTO branch office, from Certificate of Registration Encumbered to Certificate of Registration.

Chattel mortgage: Advantages & disadvantages

Let us now review the advantages and disadvantages of procuring a chattel mortgage, thus helping you make the best possible decision.

Pros of chattel mortgage -

• Makes car ownership possible for those who can't afford a four-wheeler otherwise.
• Borrowers with low credit scores can qualify.
• Less strict qualification requirements compared to traditional mortgage lenders.
• The car can be used before it is fully paid for and owned.

Cons of chattel mortgage -

• High interest rates
• Shorter loan period
• Riskier for consumers
• Low protection for the consumer
• Often viewed as the last resort rather than a preferred financing option
• Comes with significant responsibility for ownership encumbrances & on-time payment

Full-paid chattel mortgage: What’s next?

Once you have paid the lender the balance and interest fully, it is time for annotation and cancellation of the mortgage. This would officially transfer the motor vehicle’s ownership from the lender to the buyer. The said process involves two steps -

Step 1: Cancellation of mortgage

Step 2: Official removal of the encumbered annotation from the LTO Certificate of Registration (CR)

Note, that the above-mentioned steps need to be followed to cancel of mortgage is a requirement for encumbered annotation removal from the CR. Also, a separate fee is required to be paid for both the task completion as respective offices.

After the completion of both tasks (cancellation of mortgage and removal of the encumbered annotation from the LTO CR), the car owner will receive the following -

• A new Certificate of Registration
• New Motor Vehicle plates
• Stickers
• Other documents without the encumbered annotation

Are you interested in a full step-by-step guide for the cancellation of the mortgage and the official removal of the encumbered annotation from the LTO Certificate of Registration (CR)? If yes, stay tuned with Carmudi Philippines, as you’ll get to check out a comprehensive guide on the subject in the next part.

Bottom line

A Chattel mortgage is one way to buy a movable property like a car in the Philippines. It often has higher interest rates but shorter loan terms than regular mortgages. Also, it provides few consumer protections, so if a borrower defaults on a chattel mortgage, the lender has the right to repossess the vehicle.

Also Read: Prepayment of car loans in the Philippines: Meaning, penalties, benefits, & more