Question: Why Do I Need Two Documents For a Secured Loan Agreement?
Answer:A secured loan agreement gives lenders more certainty that their loan will be repaid, even when the borrower defaults on their loan. Secured loans require two documents: a loan agreement and a general security agreement.
What Are the Two Documents?
A loan agreement details the loan terms. Examples of terms included in a loan agreement include:
- when you are entitled to receive money;
- when defaults occurs; and
- which property secures the loan.
A general security agreement is the document that creates the security which allows the lender to call on that property if the loan defaults. Lenders can then register the document on the Personal Property Securities Register (PPSR) so that they have priority over later loans.
Why You Need A General Security Agreement
The PPSR is a register for all security interests registered in Australia. The register prioritises the first person to register their security interest over later registrations. If lenders only sign a loan agreement and not a general security agreement, they may not recover their debt from the borrower. Lenders who register their loan over unsecured loans will get priority.
As a lender, you should check the PPSR before giving a loan to a business. Even if you register on the PPSR, you may still find that someone has registered a pre-existing loan over the creditor’s property. The risk that the borrower will not repay your loan is much higher in that scenario.
