Are private lenders regulated, and is it legal to lend money with interest privately in Australia?

People often describe private lending as unregulated. That is shorthand for one specific point: the consumer credit regime does not apply to business lending. Plenty of other law does.

What does not apply

The National Consumer Credit Protection Act and the National Credit Code regulate credit provided to individuals and strata corporations for personal, domestic or household purposes, or to buy or improve residential investment property. Loans to companies, and loans for business purposes, are outside that regime. For those loans:

• The lender does not need an Australian credit licence.
• Responsible lending obligations, such as verifying that the loan is not unsuitable, do not apply.
• Code rights such as hardship variations and caps on certain fees do not apply.

More on where the line sits is in do companies need a credit licence lender.

What still applies

What that means for a borrower

You have fewer automatic protections than a home loan customer, and more responsibility to look after yourself.

• Get legal advice on the documents. Many lenders require it. Do it regardless.
• Know the total cost. Rate, fees, default rate and any exit fees. See comparing private loan offers.
• Check who you are dealing with. ABN, ASIC registration, a verifiable address, a solicitor acting for the lender.
• Do not sign a false business purpose declaration. See what happens if it is false.
• Ask about dispute resolution. Whether the lender is an AFCA member is a fair question.

Is it legal to lend your own money privately with interest?

Yes. There is no law in Australia that stops a person or a company lending their own money and charging interest. For loans to a company, or for a business or investment purpose, there is no statutory cap on the rate either. The courts can still strike down a default rate that is a penalty rather than a genuine pre-estimate of loss, so keep the default margin realistic. See default interest rates.

The line that matters is who you lend to and what the money is for:

• Lending to a company, or to anyone for a business or investment purpose: outside the National Credit Code. No credit licence, no responsible lending obligations. This is where most private lending sits.
• Lending to an individual for personal, household or home-buying purposes: regulated consumer credit. Doing this as a business without an Australian credit licence is an offence, and the loan terms may be unenforceable. A one-off loan to a relative is usually not “carrying on a business” of lending, but the more you do it, the closer you get.

A business purpose declaration signed by the borrower helps the lender rely on the business exemption, but it is not a shield if the lender knew or should have known the money was really for a house or personal spending. See what happens if a business purpose declaration is false.

Put it in writing

A verbal loan is legally binding, but when the borrower stops paying you will have to prove what was agreed, and that is where most private loans fall apart. A proper loan agreement sets out the amount, the interest rate and how it is calculated, the default rate, the term, the repayment schedule, events of default, who pays the legal and enforcement costs, and the security given. A simple template can do for a small unsecured loan between family members. Once there is a mortgage or caveat over property, a company borrower, a guarantee or a six figure sum, have a solicitor draw it. The cost is small next to the cost of an agreement that does not hold up.

Take security properly

• A registered mortgage over the borrower’s property is the strongest position. It gives you the power to sell if the loan defaults. See what is a caveat loan vs a second mortgage.
• A caveat alone only flags your interest on title and blocks dealings. It gives no power of sale and can be challenged, so it should sit on top of a signed agreement that grants you a charge over the land, not replace one.
• Behind a bank, you will usually want a deed of priority so the bank cannot keep advancing ahead of you. See can you lend behind a bank.
• Non-property assets such as vehicles, equipment or stock need a registration on the PPSR to rank ahead of other creditors.
• Company borrowers should give personal guarantees from the directors so a hollow company does not leave you with nothing.

The tax side

Interest you receive is assessable income and goes on your tax return. If a private company lends to a shareholder or their family, the loan needs to be on commercial terms and properly documented or the ATO can treat it as a deemed dividend. A family loan with no interest, no repayments and nothing in writing can be treated as a gift, which matters for Centrelink, estates and later disputes. The borrower can only claim the interest as a deduction if the money was used to produce assessable income; see is private loan interest tax deductible.

Lending to family to buy a house

This is the most common private lending disaster. Money goes in with nothing signed, the borrower’s bank treats it as a gift or as an undisclosed debt, the relationship changes, and the lender has no mortgage, no agreement and no clear way to get the money back. If you lend to a relative for a property purchase, document it, register your interest on title where you can, and get advice first on whether the loan is consumer credit.

If you want the return without doing the work

Many people with spare capital do not want to assess borrowers, draw documents, register mortgages and chase arrears themselves. The alternative is to invest through an established private lender that originates, documents and manages secured business loans, usually through a mortgage fund or contributory mortgage structure, which is where the AFSL question in the FAQ comes in. If you are the other side of this, a business owner who has been offered a private loan by an individual or an investor, and you want it documented and secured properly, tell us about it and we will match you with a lender or adviser who does this every week.

Mortgagee duties

A lender enforcing a mortgage must follow the notice requirements in the relevant state and, when selling, take reasonable care to sell at market value or the best price reasonably obtainable, depending on the state. Those duties apply to private lenders exactly as they apply to banks.

Direction of travel

Regulators have looked at business-purpose lending used to avoid consumer protections, and at small business lending generally. The rules may tighten. A sound lender already behaves as though they have.

This is general information, not legal advice. The site disclaimer explains the limits of what Lienhouse provides.