In order to secure the repayment of a loan or the return of loaned property, lenders frequently require the borrower to offer some property as collateral before they agree to the loan. Lenders typically require property of similar value to the loan. If the borrower defaults on the loan, then the lender will have a legal right to the property used as collateral. While the borrower complies with the terms of the loan, the lender still has a legal interest in the property. Generally, borrowers can use any of their property in any form as collateral. This guide will explore some common forms of property used as collateral below.
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Real property as collateral
Lenders may require real property, such as a house, as collateral for a loan. Home loans are a common example of a loan secured by real property. Banks generally approve home loans subject to a mortgage over the home.
The simultaneous operation of Torrens Title and Old System Title complicates the strict legal consequences of mortgages. However, the practical implications are the same. Under Old System, the mortgage technically operates as a transfer of the property. While the borrower repays the loan, they hold an equitable interest in the real property. Upon repaying the loan, the borrower has the equitable right to redeem the land.
Torrens Title, on the other hand, does not regard the mortgage as a transfer of property. Instead, it operates as a charge. The lender must register the mortgage with the land registry so that the mortgage appears on the Certificate of Title for that property. Therefore, a mortgage under Torrens Title does not need to, and does not actually create the same equitable rights and interests as a mortgage under Old System Title. However, the mortgage has the same practical use as collateral that secures the loan.
Borrowers may use real property as collateral for loans other than home loans. This typically occurs for relatively large loans. However, where the real property is still subject to a mortgage, the use of the property as collateral may require approval from the original lender.
Personal property as collateral
Due to the risk associated with using homes a collateral, many borrowers prefer to use personal property instead.
The category of personal property is very broad. It includes all forms of property except real property. Personal property that may be used as collateral includes tangible property such as motor vehicles, aircraft, watercraft, agricultural equipment, machinery, and other goods. Borrowers can also use intangible property such as intellectual property as collateral. Furthermore, borrowers can use their own financial property, including bank accounts and shares, as loan collateral.
Like mortgages for home loans, borrowers often use the personal property that they are buying as collateral. The Personal Property Securities Act 2009 (Cth) (PPSA) characterises the lender’s interest in the purchased property as a purchase money security interest (PMSI), which may have special advantages when it is registered on the Personal Property Securities Register (PPSR).
So far, this article has identified types of collateral that involve specific pieces of property, such as a car or a house. However, lenders can also take all present and after acquired property (AllPAAP), with or without exceptions, as collateral. When borrowers agree to offer AllPAAP as collateral, all the personal property that they own as well as all the personal property that they come to acquire after the loan becomes loan collateral. The loan agreement may specify certain property to exclude from the AllPAAP.
Next Steps
In order to protect your interests, seek independent professional legal advice before agreeing to a loan.
