1.1Two kinds of promise
Every loan is a promise to repay. What separates the two kinds is what stands behind that promise if it is broken.
Secured
You provide an asset as security; Moneysmart’s example is a car. If you don’t repay, the lender can take the asset and sell it.
The interest rate is usually lower than on an unsecured loan.
Unsecured
You provide no security, and these loans usually have higher interest rates.
If you don’t repay, the lender can take legal action to recover the money.
On an unsecured loan, then, the lender’s remedy runs to a court. On a secured loan it can run to the asset as well, and the National Debt Helpline notes that the lender may also take the borrower to court for the debt without seizing anything.
The rest of this site follows the asset: the notice before it can be taken, the changes a borrower can ask for, what happens once it has gone, and how an amount can be challenged.
1.2What the sources put up as security
The official examples are ordinary, valuable things. Moneysmart’s personal loans page names a car. Its page on debt consolidation names a home or a car, put up as security for a secured debt.
That page also warns that a home or car put up as security for a new loan may be at risk if the new loan can’t be paid off, because the lender can sell it to get back the money it lent.
This site uses two plain words for those things: goods, such as a car, and land, such as a home. The sources describe the two separately once a loan goes wrong, and the guide on what happens after the asset is taken follows each in turn.
1.3When the National Credit Code covers the security
The National Credit Code uses the word mortgage, and section 7 sets out when the Code applies to one:
“(1) This Code applies to a mortgage if: (a) it secures obligations under a credit contract or a related guarantee; and (b) the mortgagor is a natural person or a strata corporation.”
“(2) If any such mortgage also secures other obligations, this Code applies to the mortgage to the extent only that it secures obligations under the credit contract or related guarantee.”
National Credit Code, section 7
In plainer words, the Code reaches the security when it backs a credit contract and the person who gave it is an individual or a strata corporation. A credit contract, in the Code’s own definition, is one under which credit the Code applies to is or may be provided. If the same mortgage also backs something else, the Code reaches only the part that backs the credit contract or a related guarantee.
The Code also sets a starting point for disagreements about whether it applies. Where a party claims that a credit contract, mortgage or guarantee is one the Code applies to, section 13 says “it is presumed to be such unless the contrary is established”. The same section goes on to deal with a declaration a borrower may make under it, so read the whole section before relying on the presumption.
1.4A person can stand behind the loan too
Security is a thing; a guarantee is a person. Moneysmart describes a guarantor as someone who agrees to repay the loan if you can’t, and says this can put their finances at risk.
Section 8 of the Code applies to a guarantee on the same pattern as section 7 does to a mortgage:
“(1) This Code applies to a guarantee if: (a) it guarantees obligations under a credit contract; and (b) the guarantor is a natural person or a strata corporation.”
National Credit Code, section 8
Guarantors appear again later in this record, because the Code lets a guarantor, like a borrower or a mortgagor, ask a court to reopen a transaction it finds unjust. That is in disputing the amount, and the courts.
1.5The thing does not decide which rules apply
ASIC’s guidance on responsible lending, Regulatory Guide 209, looks at what a loan is for, not at what secures it. Where a loan is wholly or predominantly for a business purpose, ASIC says the responsible lending obligations don’t apply to it, and that stays true when the borrower is an individual whose home or other personal assets secure the loan.
ASIC’s own example is a loan to a farmer for essential farm repairs and feed for stock: it is for business purposes and is not regulated, whether or not it is secured over the farmer’s home.
This site follows loans taken for personal purposes, the kind the Code is written for.
1.6What security does not change
Security gives the lender a thing to fall back on. It does not set a ceiling on what the borrower owes: the National Debt Helpline says a lender may take a borrower to court for any debt remaining after the asset has been sold.
Moneysmart says the same of a home. Eviction does not release you from the obligation to pay the loan, and the lender may sell the home and recover any outstanding balance by taking further legal action.
Some of the protection around the thing is not the borrower’s at all. The National Debt Helpline points out that mortgage insurance, or lenders mortgage insurance, is there to protect the lender in case you default, even though you pay for it.
Under section 71 of the Code, if the parties agree to change the terms of a credit contract, mortgage or guarantee, the lender must give the other party written notice of the change no later than 30 days after the agreement. That rule does not apply to a change that defers or otherwise reduces the borrower’s obligations for 90 days or less.
1.7Where the record goes next
The record continues at the first missed payment, in the default notice and the wait before enforcement.