Debentures, secured & unsecured notes

Delving into debentures, secured and unsecured notes

Debentures, secured and unsecured notes are types of investments that pay interest. Companies issue them as a way to raise funds from investors. In return for your money, the company promises to make regular interest payments, and return the money you lent them on a date in the future.

Debentures, secured and unsecured notes usually offer higher interest rates than bank deposits, but also carry higher risks. Read the prospectus carefully to find out about the company, how it will use your money, the risks and the terms of the investment.

How debentures, secured and unsecured notes work

Debentures, secured and unsecured notes are fixed interest investments. This means that the interest rate on the money you lend is set in advance. The issuer may give you (through the trustee) security for repayment of your money. If that security is tangible property the notes can be called debentures. 

If it is a first ranking security interest over other property (e.g. a debt) then they might be called secured notes, but if there is no security then they must be referred to as unsecured notes. The reference to being secured is not an indication of a less risky product, so read the prospectus carefully.

Debentures are usually offered for set periods, for example 1, 3, 6 or 12 months. Some debentures have a set period of 5 years. Unless they are offered 'at call', you do not have the right to ask for your money back before the set period expires. Some companies may be prepared to repay your money early on hardship or compassionate grounds; however a penalty is likely to apply.

Debentures, secured and unsecured notes are unlisted investments. This means they can't be traded on a secondary market like the Australian Securities Exchange (ASX). So it is very difficult to sell them if you decide you no longer want the investment.

Even though these products are not listed on a market, issuers must ensure that they keep investors continually updated on things that affect their investments in a material way. 

This means you should consider what an issuer's prospectus says about how they will keep you up to date, including how you can access information.


Although a debenture issuer may seem like a bank, they are not a bank, so the government guarantee on deposits does not apply. You could easily lose all your investment if the company or project fails.

Video: Debentures explained

Debentures explained video

James Mason from ASIC explains how debentures work and why they are risky.

Understand the risks

To understand the risks you should read the prospectus to find out exactly how the company will use your funds. It might use your money to finance a wide range of investment activities, or may on-lend your money to another business. The riskier the activity, the more careful you should be. See more information on reading a prospectus. 

It is important that you: 

  • understand the return being offered and whether it will compensate for the risks
  • understand how the risks of investing in debentures compare with other investments paying interest
  • have diversified your investments
  • are clear on why debentures are suitable for you
  • seek professional financial advice if you are unsure of any aspects of the investment.

Check the security being offered

The prospectus should tell you what security, if any, is being offered for your loan. A secured note will generally carry more risk than a debenture because it will not be secured entirely over tangible property.

As the lender, you must judge what the security is worth if the company should default. For example, a company may take your money and on-lend it to others, taking a mortgage over the borrower's property. To asses this you would compare the size of the loan to the value of the property and look to see what percentage of these loans are behind in their repayments or in default. Find out how the company values the properties they take mortgages over.

If you notice a high number of loans are not being repaid on time, this is likely to be a riskier investment in which you may lose some or all of your capital.

Valuing the underlying investment

To be safe, assume that a company's valuations are optimistic. Valuations for property developments must be done on an 'as is' and 'as if complete' basis. But, if the development fails before completion, the land with a half-finished building could be worth even less than the land before the project started.

When a bank values people's homes, the valuation is usually lower than the price paid for the home. The bank is trying to protect itself, and you should do the same when you are the 'banker'.

If you are still unsure about the investment, try explaining the business to a friend. If you can't explain how it works, stick to a safer investment where the risks are clearer.

Check the benchmarks

ASIC has developed some benchmarks that apply to unlisted debentures and unsecured notes to help you assess the risks and decide whether to invest your money.

Read Investing in unlisted debentures and unsecured notes booklet for more information on these benchmarks and how you can use them.

Case study: Mavis loses her money in a secured note

Woman after losing her money in a secured note

Mavis was reading the newspaper when she came across an ad asking for investors in a new secured note. The finance company in question was offering an interest rate of 8.5% p.a. on a minimum investment of $5,000 for a term of 5 years. This sounded great to Mavis so she asked for a prospectus to be sent to her. Mavis decided to invest $50,000 of her retirement savings in the unlisted secured note because the interest rate seemed too good to pass up.

The finance company planned to use investors' money to on-lend to property developers. It offered its loan book as security. Six months after Mavis invested her money, the finance company went bust. The company directors had overestimated the company's assets resulting in valuations being overstated. There was no return to investors. Mavis lost a big chunk of her hard earned retirement savings.


A large number of debentures are offered where the initial term can be extended. This is called a rollover. Before the term of the debenture expires, you will be contacted by the company to see if you'd like to extend the term. If you do nothing, the company will automatically rollover the debenture for the same set term as the original investment and you will not be able to access your money until the end of the new period.

The company does not have to provide another prospectus to rollover your investment. You should take the same care to consider the potential risks of extending the investment, as you did with your original investment.

The company's business or financial position may have changed since you originally invested. Check the company's website for its financial report for the year and other information that could affect the value of your investment. See keep track of your investments for more information.

What to do if things go wrong

If something goes wrong with your debenture, secured or unsecured note you may be able to recover some of your money. Contact the company first with a formal complaint. If you don't get a satisfactory outcome see our how to complain webpage for details on how you can take your issue to an external dispute resolution scheme if the debenture issuer is a member of a scheme.

While debentures, secured and unsecured notes may seem very attractive, you could easily end up losing everything if the company or project fails. Seek financial advice before you invest in one of these products.

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Last updated: 12 Dec 2018