What happens if you can't repay a private loan?

Private loans are built around a single event. A first mortgage, second mortgage or caveat loan funds a need, interest is often prepaid or capitalised, and the whole balance is repaid in one go when a property sells, a bank refinance settles or a contract pays. When that event arrives late, the loan doesn’t stop. It reaches its maturity date with no money to repay it.

This guide walks through what happens next, stage by stage, so you can see where the costs build and where the exits still are. If your term is close to expiring and you want to ask for more time, read private loan term extensions as well. If a default notice has already arrived, see refinancing a loan in default.

Key terms

• Maturity date: the date the whole loan must be repaid.
• Event of default: anything the loan agreement treats as a default, including failing to repay at maturity.
• Default interest: a higher charge that applies while a loan is in default. Our glossary entry on default interest explains it.
• Default notice: the formal written notice a lender gives before it can enforce its security.
• Mortgagee in possession: a lender that has taken control of the property to sell it. See mortgagee in possession.
• Shortfall: what’s still owing after the property is sold and the proceeds applied.

What counts as “can’t repay” on a private loan?

In private lending, the most common default isn’t a missed monthly instalment, because many loans don’t have one. It’s reaching the maturity date without the exit having happened. The sale hasn’t settled, the bank hasn’t approved, or the contract payment is still weeks away.

Loan agreements usually list other events of default too, such as letting insurance lapse, allowing council charges or land tax to fall into arrears, letting another party lodge a caveat or judgment against the property, or giving information that turns out to be wrong. Read the default clause in your Letter of Offer and loan agreement so you know which events matter.

What happens, stage by stage?

Stage	What usually happens	Your best move
Six to eight weeks before maturity	Nothing formal yet; the lender may check on the exit	Tell the lender if the exit is slipping and why
Maturity passes unpaid	The loan is in default under its terms	Put a written plan with dates in front of the lender
Default costs start	Default interest, default fees and the lender’s legal costs begin to accrue	Ask for a payout figure so you know the real number
Formal default notice	The lender gives the notice its mortgage and state law require	Diarise the expiry; get your solicitor involved
Enforcement begins	For a registered mortgage, possession steps and preparations to sell	Push a refinance or your own sale to settlement
Mortgagee sale	The lender sells; proceeds pay costs and lenders in order	Check the sale figures and any shortfall claim

What does default actually cost?

More than most borrowers expect. Default interest usually applies to the whole balance while the default continues, default and administration fees may be charged, and the lender’s legal costs of notices and enforcement are normally added to the payout figure. On a loan with capitalised interest, all of that compounds into a balance that grows faster each month.

There are limits. ASIC’s guidance on unfair contract terms covers standard-form small business contracts, including loans with an upfront price of $5m or less (interest isn’t counted towards that cap), where the business has fewer than 100 people or turnover under $10m. One of ASIC’s own examples is a default fee for a single missed repayment that costs the business more than the lender needs to protect itself, which may be unfair. Have your solicitor review any default charges that look out of proportion.

How does enforcement work on a registered mortgage?

Before a registered mortgagee can sell, the mortgage and state property law generally require a written default notice giving you a period to remedy the default. The period differs between states and documents, so ask your solicitor exactly when it expires.

If you don’t fix the default and don’t hand over the property, the lender usually needs a court order for possession. NSW shows how that runs. A claim for possession starts with a Statement of Claim in the Supreme Court’s Possession List. The Judicial Commission’s bench book notes a defendant has 28 days from receipt to file a defence; without one, the lender can seek default judgment, which is ordinarily entered within about three weeks of filing. The lender then applies for a writ of possession, and the Sheriff will not ordinarily execute it in less than six weeks after receiving it.

The court can stay enforcement, but the bench book notes that a borrower applying for a stay should be able to explain any inaction, and whether money has been paid since default is a key factor. Other states have their own procedures; the pattern of notice, court order and enforcement is similar.

What happens if it’s a caveat loan?

A caveat loan is different because the lender holds a caveat, not a registered mortgage. A caveat doesn’t carry the statutory power of sale that comes with a registered mortgage. Instead, the lender relies on the loan agreement: it can sue for the debt, seek court orders to enforce its charge over the property, and keep its caveat in place so you can’t sell or refinance without dealing with it.

Many caveat loan agreements also require the borrower to sign a registered mortgage if asked, which is one reason caveat loans often convert to a registered second mortgage when an exit stretches. In states where caveats can lapse, timing adds another layer; see caveat lapsing notices by state.

Who gets paid first, and who covers a shortfall?

When a property is sold under a mortgage, the proceeds pay the selling costs, then each lender in order of priority. A first mortgagee is paid before a second mortgagee, as our page on how second mortgages rank explains. Any surplus goes down the line and finally to the owner.

If the proceeds fall short, the remaining debt doesn’t disappear. The borrower still owes it, and if there are guarantors, the lender can generally pursue them under their guarantees. A forced sale on the lender’s timetable rarely achieves what a well-run campaign by the owner would, which is why the off-ramps below matter.

What rights and outside help do business borrowers have?

The National Credit Code generally applies to credit for personal, domestic or household purposes or residential investment, not to loans predominantly for business purposes, so consumer hardship rules usually don’t apply. A signed business purpose declaration isn’t always the end of the matter, though; the NSW bench book notes a court can examine what the lender knew or believed about the loan’s real purpose.

Beyond unfair contract term protections, AFCA handles complaints from small businesses with fewer than 100 employees about credit facilities of up to $5m, provided the lender is an AFCA member. AFCA’s guidance says to contact it immediately if you receive a Statement of Claim.

What are your off-ramps?

Option	When it works	What the lender needs to see
Early conversation	Any time before maturity	An honest reason and a revised date
Term extension	The exit is delayed but still real	Fresh evidence of the exit and enough equity left
Refinance to another private lender	Your lender won’t extend, or terms don’t suit	Equity after default costs, a clean exit, accurate payout figure
Sell on your own terms	The property is the exit and buyers exist	A listing, a contract or a realistic campaign
Partial paydown or release	You have other assets or cash coming	A smaller loan against the remaining security
Convert a caveat to a registered mortgage	A caveat loan needs longer	Signed mortgage documents and any consent needed

Our guides to bridging until a property sells and paying out an expiring private loan cover the last two ideas in practice.

Illustrative example: a Gold Coast café owner has a $350k caveat loan due in five weeks, to be repaid from the sale of an unencumbered investment unit. Illustrative: the buyer’s finance falls over. Instead of waiting for maturity, the owner tells the lender the same day, relists the unit and enquires about a six-month private first mortgage over it. The new loan settles before maturity, pays out the caveat loan in full and capitalises its interest. The unit sells four months later, the first mortgage is repaid from settlement, and no default interest or enforcement costs are ever incurred.

How do you stop this happening on the next loan?

Choose a term with a buffer beyond the expected exit date, test the exit before you sign, and keep the lender informed. Our guides to exit strategy for a short-term mortgage and exit strategy red flags show what lenders look for. If you want to talk through options for a loan that’s nearly due, start a confidential enquiry.

Loan maturing and the exit is late? See if you qualify to refinance

A refinance only works while there’s equity and time, so the best moment to ask is before the maturity date. Our lending partner fundU is a direct private lender with loans from $20k to $5m, no formal valuation required, and funding possible within 24–48 hours once documents are in.

Your enquiry involves no credit check and isn’t sent out to a crowd of lenders; a specialist looks at it personally. Tell us honestly what’s owing, the maturity date and what has delayed your exit, and you’ll get a realistic answer fast. See if you qualify to refinance.