Promissory notes backed by collateral
What you need to know about secured 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 IRA is the lender.
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.
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. See our Loans & Notes Receivable page for more information.
Common reasons investors choose secured promissory notes
- You negotiate all loan terms
- You can enjoy the reliability of regular cash flow
- If using a secured note for real estate, you can avoid the challenges of owning the actual property (no maintenance, tenant communications, evictions, etc.)
Common risks when investing in secured promissory notes
- There’s always the danger of default
The Internal Revenue Service (IRS) has certain rules to keep in mind when considering an investment in secured 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.