Private money lending between individuals is common in Australia, but requires understanding legal obligations, risks, and best practices.
What is Private Money Lending?
Private money lending is when individuals lend money to each other outside traditional financial institutions, typically secured by property or other assets.
Common scenarios:
- Family member loans
- Friend/business partner funding
- Investor to developer
- Peer-to-peer lending platforms
- High-net-worth individual lending
Legal Requirements in Australia
Must Have Australian Credit License (ACL)
If you lend money for profit/business, you need ACL:
- Lending to 5+ people
- Regular lending activity
- Charging interest as business
Exempt (no ACL needed):
- One-off family loan
- Friends helping friends
- <5 loans total
- No interest charged (gift)
Penalty for unlicensed lending: Up to $1.1 million fine
Check with ASIC before lending commercially
Loan Agreements Must Be Written
Essential elements: ✅ Loan amount ✅ Interest rate (if any) ✅ Repayment terms ✅ Security details ✅ Default consequences ✅ Both parties' signatures ✅ Date
Verbal agreements:
- Legally enforceable BUT
- Very difficult to prove
- Always use written agreement
For Borrowers: Getting Private Loans
Where to Find Private Lenders
1. Family & Friends
- Most common source
- Often lower/no interest
- Flexible terms
- Can strain relationships
2. Licensed Private Lenders
- Professional lenders with ACL
- Property-backed loans
- Commercial terms
- Regulated protection
3. Peer-to-Peer Platforms
- Online matchmaking
- Regulated platforms
- Transparent terms
- Rates: 6-15% p.a.
4. High-Net-Worth Individuals
- Through introducers/brokers
- Larger loan amounts
- Property security required
- Rates: 8-16% p.a.
Typical Private Lending Rates
Family/Friends:
- No interest: Common
- Below market: 2-5% p.a.
- Market rate: 6-10% p.a.
Commercial Private Lenders:
- Residential: 7-15% p.a.
- Commercial: 8-18% p.a.
- Development: 10-20% p.a.
For Lenders: Lending Your Money
Before You Lend
Ask yourself:
- Can I afford to lose this money?
- Do I need ACL? (Check ASIC)
- What security will I take?
- How will I enforce if they don't pay?
- What interest rate is fair?
Never lend money you can't afford to lose
Protecting Yourself as Lender
1. Take Security
Property Security (Best Protection):
- Register mortgage on title
- First or second position
- Lender's caveat for short-term
- Valuation required
- Legal costs: $1,500-$3,000
Other Security:
- Vehicle ownership
- Business assets
- Personal guarantee
- Guarantor
2. Credit Check
- Get borrower's consent
- Check for defaults, bankruptcy
- Understand their situation
3. Verify Income
- Can they afford repayments?
- Bank statements
- Tax returns
- Employment verification
4. Legal Documentation
- Use solicitor (essential!)
- Loan agreement
- Mortgage/security documents
- Never skip this step
5. Insurance
- Lender's mortgage insurance (expensive)
- Life insurance on borrower
- Property insurance (if secured by property)
What Interest Rate to Charge?
Fair market rates:
- Risk-free (family, secured property): 5-8% p.a.
- Low risk (friend, good security): 8-12% p.a.
- Medium risk (business loan, moderate security): 10-15% p.a.
- Higher risk (credit issues, weaker security): 12-20% p.a.
Must be commercial (not excessive):
- Courts can void unconscionable loans
- Keep rates reasonable for circumstances
Tax Implications
For Lenders (Receiving Interest)
Interest is taxable income:
- Declare on tax return
- Taxed at your marginal rate
- Even if borrower is family
Example: $100,000 loan @ 8% p.a. = $8,000 interest/year
- Tax (37% bracket): $2,960
- Net: $5,040 (5.04% after-tax return)
Record keeping:
- Keep loan agreement
- Track interest received
- Provide to accountant
For Borrowers (Paying Interest)
Personal loans: Not tax deductible
Business/Investment loans: Tax deductible
- Must be for income-producing purpose
- Keep receipts
- Declare on tax return
Risks
Risks for Lenders
1. Default (Borrower doesn't pay)
- Most common risk
- Can enforce security BUT
- Legal process expensive
- May not recover full amount
2. Property Value Drops
- Security worth less than loan
- Shortfall on sale
3. Borrower Bankruptcy
- Join queue of creditors
- May get cents on dollar
- Long process
4. Relationship Damage
- Family/friend loans often cause issues
- Money and relationships don't mix well
- Be prepared for awkwardness
5. Legal Costs
- Enforcement expensive
- Court proceedings: $10,000-$50,000+
- May exceed loan amount for small loans
Risks for Borrowers
1. Higher Rates
- Private typically more expensive than banks
- Can be 2-10% higher
2. Shorter Terms
- Usually 1-5 years (vs bank 10-30)
- Need exit strategy
3. Relationship Strain
- Owing family/friends causes stress
- May affect personal relationships
4. Less Regulation
- Unlicensed lenders not regulated
- Limited consumer protection
- Check ACL status
Family Loans: Special Considerations
Advantages
- Often interest-free or low rate
- Flexible repayment
- No credit check
- Fast access
Disadvantages
- Relationship risk (biggest)
- Expectations may differ
- Family dynamics affected
- Other family members may resent
Best Practices for Family Loans
1. Treat it Like Business
- Written agreement (essential!)
- Set clear terms
- Stick to schedule
- Don't assume flexibility
2. Be Realistic About Repayment
- Only borrow what you can repay
- Build in buffer
- Communicate early if struggling
3. Consider Involving Third Party
- Solicitor drafts agreement
- Accountant as witness
- Keeps it professional
4. Discuss with Other Family
- Transparency avoids resentment
- Especially for inheritance implications
How to Enforce if Borrower Defaults
Step 1: Communicate (Week 1)
- Contact borrower immediately
- Understand what happened
- Seek payment plan
Step 2: Formal Notice (Week 2-4)
- Letter of demand
- 30-day notice to pay
- State consequences
Step 3: Legal Action (Month 2+)
- Engage solicitor
- Court proceedings
- Judgment obtained
Step 4: Enforce Judgment
- Sell secured property
- Garnish wages
- Bankruptcy proceedings (last resort)
Cost: $10,000-$50,000+ in legal fees
This is why security is critical
Private Lending Through Platforms
Regulated P2P platforms in Australia:
- SocietyOne
- RateSetter
- Others
How they work:
- Platform holds ACL
- Matches lenders and borrowers
- Handles documentation
- Manages repayments
- Takes cut of interest
Advantages:
- Diversify across many loans
- Platform handles admin
- Regulated process
- Start with small amounts ($1,000+)
Risks:
- Still risk of default
- Platform could fail
- Not government guaranteed
Returns: 4-10% p.a. typically
When to Use Private Lending
As Borrower: ✅ Bank declined ✅ Need funds urgently ✅ Family willing to help ✅ Short-term need ✅ Have clear repayment plan
As Lender: ✅ Have spare capital ✅ Want better return than bank ✅ Understand and accept risks ✅ Can afford to lose it ✅ Will take proper security
Need professional private lending? Connect with licensed lenders.