Security, guarantees and loan structuring
Domain focus
Security, guarantees and loan structuring tests whether you can protect the lender while ensuring guarantors and borrowers understand the risks.
Core rules
- Security interest: a lender takes an interest in an asset under the PPSA 1999; register on the PPSR to perfect priority.
- A guarantee must be in writing and signed by the guarantor; prescribed disclosure must be given before the guarantee is given, and guarantors should understand they may have to pay if the borrower defaults.
- Lenders commonly require independent legal advice for guarantors; failing to explain the guarantee can undermine enforcement.
- Structure loans by term, repayment frequency, fixed or variable mix and security; match structure to cashflow and risk.
Worked example
Parents guarantee their daughter's $20,000 car loan. The lender sends the guarantee document but no explanation and no advice certificate. Reasoning: the guarantor must receive prescribed disclosure and understand the obligation; if the lender cannot show this, the guarantee may be unenforceable or the lender may face a dispute. The security interest in the car should also be registered on the PPSR.
Traps
- Treating a guarantor as if they were the borrower.
- Failing to register a security interest, losing priority.
- Describing collateral too vaguely.
- Not assessing the guarantor's own ability to pay.
- Assuming a guarantee is always limited to the original loan; check whether it covers variations.