Loans & Notes Receivable
Unsecured promissory notes
What you need to know about unsecured promissory notes before you invest.
A promissory note is a legally binding contract outlining the borrower’s promise to pay back a sum of money to the lender within a defined time frame. Promissory notes are a form of private money lending. Basically, it’s a legally-binding “IOU.” In this case, your self-directed Individual Retirement Account (IRA) is the lender.
Unsecured promissory notes are a more informal contract, in which the lender does not have the opportunity to claim any collateral in the case of a default without additional legal action.
Secured promissory notes indicate that the lender will receive a previously agreed upon asset or property as collateral for the note if the borrower defaults. See our Secured Notes page for more information.
Common reasons investors choose unsecured promissory notes
- Typically have higher interest rates and/or monthly payments than secured notes
- Higher volume of readily available borrowers
Common risks when investing in unsecured promissory notes
- There’s always the danger of default, and in this structure, there is no way to recoup your losses without legal action
- Selling these types of notes is more difficult than secured notes as buyers are harder to find and selling requires a greater discount
The Internal Revenue Service (IRS) has certain rules to keep in mind when considering an investment in unsecured promissory notes.
- The interest rate on your promissory note cannot be above or below market rate.
- You cannot invest in any asset related to the cannabis industry or a marijuana-related business (MRB). This includes using an MRB to secure a promissory note, a promissory note to, or paid by, an MRB.
- You cannot lend money from your IRA to yourself or other disqualified persons, directly or indirectly. Take precautions to ensure that you avoid prohibited transactions.
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2. Prepare your promissory note
Promissory notes must outline the following terms:
-Amount of loan
-Date of issuance
-Interest rate and compounding period (annually, quarterly, monthly, daily, or none)
-Parties to the agreement: lender (“Provident Trust Group FBO Client Name”), borrower, and loan servicer
4. Send your supporting documentation
Along with your Direction of Investment form, you must provide the following:
-Copy of the promissory note
-Amoritization schedule (if applicable)
-Loan Servicer Agreement or Waiver
5. Receive a confirmation
You will receive an email confirmation once your request has been processed and your funds have been scheduled to leave your account.
You are responsible for performing due diligence on your investment. Every investment has unique risks and any decision to invest should only be made after you conduct a thorough review of the investment and any parties related to the investment. Provident Trust Group is a passive, directed custodian and as such does not provide any type of investment advice or due diligence.