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

Auto loans are a lucrative business that attracts swarms of prospective car buyers each year. In 2019, India-based market intelligence firm Ken Research conducted a study that projected outstanding auto loans in the Philippines to reach P4.3 trillion by 2023.

If the study is any indication, a rapidly growing number of Filipinos are financing their car purchases through banking institutions. Whether it's first-time car buyers buying a second-hand starter sedan like the Mitsubishi Mirage G4 or a seasoned car enthusiast making a big purchase like the Ford Mustang, car loans have become a viable choice for many.

That said, it's not always easy to understand the ins and outs of car financing if it's your first time doing it. Some terms may seem unfamiliar or too complex for a beginner. Take chattel mortgages, for example. Upon reading the phrase, many might say it sounds like banking jargon, but it's quite simple in truth. Let us explain what a chattel mortgage for auto loans is and how it works.

To understand a chattel mortgage in the context of auto loans, we first have to cover what a mortgage actually is. Generally, a mortgage is a legal agreement by which two parties, the creditor and the debtor, arrange for a loan agreement that sees the former lend money to the latter for purchasing physical property.

The debtor agrees to pay the lender the balance and interest over time, typically over several years. The property itself serves as collateral if the debtor fails to settle their debt. 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.

More specifically, a chattel mortgage refers to a mortgage on movable property, including manufactured homes, construction equipment, and in this case, automobiles.

A chattel mortgage differs from a regular mortgage in that it is usually more expensive, comes with shorter repayment periods, and the lender typically owns the movable property until the balance is paid in full.

In the Philippines, there are specific regulations that pertain to chattel mortgages. For example, any approved auto loan must be registered in the Registry of Deeds office to be recognized in accordance with the law. One would also have to have the chattel mortgage canceled at the same office when it has been fully paid.

There certainly are advantages and drawbacks when availing of a chattel mortgage to fund your auto loan. For many Filipinos, it's the only way to afford to take home their dream vehicle without saving up tirelessly for several years. On the other hand, chattel mortgages tend to come with higher interest rates, shorter repayment terms, and higher monthly payments. They also come with significant responsibilities, including ownership encumbrances and on-time payments.

Opting for a chattel mortgage is a big commitment that deserves plenty of thought and consideration. If planned and done right, it can be a viable way to buy a car. While there are more requirements and steps to face than a regular cash purchase, it doesn't seem to deter many, as evidenced by the high number of car buyers securing auto loans in recent years.