As traditional lenders and banks tighten their belts, and consumers feel the pressures of interest rate hikes and the rising cost of living, alternative solutions are becoming more popular with many people looking to obtain finance through private lending, including friends and family, explains Attwood Marshall Lawyers Commercial Litigation Senior Associate Georgia Taylor. Anyone offering a loan must be aware of the risks involved and how to protect their investment if the loan cannot be repaid.
With the RBA releasing its final cash rate increase for 2022, bringing the cash rate to an eight year high, it is no secret that interest in regulated lending has fallen, and private lending is becoming more attractive to the everyday consumer and its investors.
It has been reported that the private lending market more than doubled in 2021 and has grown ten-fold over the past 10 years, currently estimating to be a $1.4 billion-dollar industry.
As a private lender, being an individual or company, you can stand to profit from lending money to friends, family or third parties at a competitive interest rate.
Going into 2023 with some economic uncertainty, it is important that private lenders keep track of any lending, document it appropriately and of course, take the appropriate security.
Without the appropriate security for your lending, the lender stands to sit in a line-up of a borrowers many other secured and/or unsecured creditors if they become bankrupt, or in the case of a company, enter liquidation.
With interest rates rising, “mates’ rates” loans are becoming more prevalent. Unfortunately, these loans go hand in hand with the requirement of the borrower needing money quickly and a level of informality that can leave both parties in the lurch and without recognition of their legal rights.
Frequently we are seeing informal lending arrangements being entered into on a “pay-day” basis. This is when a large sum of money is being lent for a short return based on an event happening within a business or someone’s personal life. Due to the sum of money being lent, the lender asks for “security” over real or personal property.
Real property is the land and fixtures or structures on it. Personal property is tangible assets or “chattels”, such as a car.
As a lender, you can take security over real and personal property, but only with the appropriate documentation in place. Many people think they can lodge a caveat over property to recover or secure a loan, but this is only if you have the proper legal agreement in place that allows you to do so.
There are several options for a private lender to take security over real property. These can include:
- A mortgage, which entitles you to the ordinary rights of a mortgagor in the state or territory the property is located in. A mortgage can be registered on the title of the borrower’s property in favour of the lender, to secure the sum payable under the loan.
- A charge over the property which creates a caveatable interest. A caveat can then be registered on the title of the real property in favour of the lender.
Depending on which state or territory the property is located, will depend on the requirements that the lender and borrower have to appropriately document the mortgage or charge to ensure it is enforceable.
Common pitfalls of taking security over real property may include:
- Not having the terms and conditions put in writing and signed by the parties;
- Not lodging the title documents accurately, or lodging the title with inaccurate details;
- Security being taken properly, but there being no equity in the property for there to be any benefit to the security.
Of course, not everyone has the benefit of owning their own home, so in these circumstances or perhaps when lending to a company running a business, there is the option of taking out security over personal property.
The securitisation of personal property is set out in the Personal Properties and Securities Act 2009 (Cth) (PPSA). When a lender and borrower have set out terms which a security interest over personal property is taken, it is then registered on the Personal Properties and Securities Register (PPSR).
An enforceable registration under the PPSA has varying requirements, depending on the type of property being secured and when the security needs to be realised. The following are some common issues often seen with registrations on the PPSR:
- The collateral class not being identified;
- The time for the registration not being accurately put;
- The incorrect asset details being registered (issues with VIN numbers);
- The entity type of the grantor and secured party details not being accurate.
Any of the above issues could render a PPSR registration unenforceable in the event that the assets need to be realised and/or the security needs to be enforced during an insolvency event.
I’ve loaned money and it has not been repaid – what happens next?
If you have entered an informal lending arrangement and/or need to realise your security interest, it is important that you speak with a legal professional with experience in this area of law.
Obtaining the right advice and having different enforcement mechanisms in place is vital to ensure as a lender, you get the money you are owed.
You may need to issue Court proceedings to recover the property pursuant to the security granted to you. If your security is improperly documented, you may fail to be able to enforce your rights and be left in the lurch.
The better way is to get the right advice up front and properly document the loan, securities, and the steps to take if there is a default. Just make an appointment to come and see us!
Attwood Marshall Lawyers – helping people claim what is rightfully theirs
At Attwood Marshall Lawyers, we have a dedicated team of lawyers who practice exclusively in dispute resolution and commercial litigation. Our team will review every case on its own facts and merits and be able to identify the best course of action.
To discuss your specific matter and find out how to collect debt owing to you or your business, call our Commercial Litigation Department Manager, Amanda Heather, on direct line 07 5506 8245, email email@example.com or free call 1800 621 071.