Promissory notes, mortgage notes, trust deeds and hard money loans are all terms used for private lending investments options, which allow a non-bank investor to finance a note for a borrower.
A promissory note is a financial instrument, which is a written agreement or “promise” between two parties, with one (the note's issuer) agreeing to pay the other (the note's payee) a defined sum of money under specific terms. The terms outline when and how the payee returns the money to the issuer. The promissory note defines all terms of the agreement, such as the principal amount, interest rate, maturity date, place of issuance, issuer's signature and ramifications if the terms are not met.
Both companies and individuals may issue promissory notes. Private lending notes allow companies and individuals to receive loans from sources outside of a bank. This source can be an individual or a company willing to provide financing under the agreed-upon terms. The notes can be secured by collateral or non-secured with nothing backing up the note other than the borrower’s promise to pay. Often a third party, called a loan servicer, works in conjunction with the lender and handles the loan documents, filings and money transfers.
Mortgage Notes and Trust Deeds are very similar and both go hand in hand with promissory notes. Often the terms are used interchangeably, but there is a difference. Both mortgage notes and trust deeds secure repayment of a loan by attaching a lien on property. A mortgage note is between the borrower and the lender. If the borrower fails to pay, the lender must go through the court system to foreclose on the loan and either sell or obtain ownership of the property. Parties to a trust deed include the lender, borrower, as well as a trustee. The trustee holds onto the title of the property used as collateral. The trust deed allows lenders to bypass the court system in order to foreclose on the loan.
Hard money is an industry term used when financing is obtained through non-bank sources. Hard money loans are the same as promissory notes. A lender gives money to a borrower under certain terms and conditions for repayment of the loan. Individuals or companies can be on either side of the transaction. The stated interest rate for hard money loans is usually higher than conventional bank loan rates. Borrowers may finance an entire project with hard money loans or they may use both bank and non-bank loans.
Investors are encouraged to do adequate research or contact a broker/financial advisor, attorney or CPA to determine if private lending is an appropriate investment. Once you have determined that private lending is suitable for you, a specific note can be purchased with your Self-Directed IRA or other retirement account at Mainstar Trust. Click here to discover how to use a Mainstar Trust account to invest in a private lending product.