Small business owners and entrepreneurs understand the importance of creating wealth to secure their future and retirement age. In this endeavor, they seek opportunities to maximize their income through different sources. Their decisions reap benefits when they have the correct financial guidance. For instance, workplace retirement plans may not be accessible to them anymore. But they can sign up for options that cover self-employed people. These include self-directed IRA, Solo 401(k), SEP IRA, SIMPLE IRA, and Defined Benefit Plan. Each plan is unique and brings some excellent savings opportunities. What you select from them depends on your situation and plan qualification.

Of these 5 best retirement plans, the top picks can be Solo 401(k) and self-directed IRA. People who invest in these options want to reduce their tax liabilities by aiming for higher returns. If you invest in promissory notes, you benefit in many ways, such as portfolio diversification, lower volatility risks, good returns, and maximum control over your investment. You can expect protection when a secure asset like real estate supports the note. If the borrower doesn’t clear the loan, the lender can seize the property through foreclosure. But some notes come without any assets directly supporting them. These unsecured notes offer attractive returns, but high-risk factors can be threatening. One must tread this path carefully.

Unsecured notes

A lender can give money to a borrower after agreeing to the purpose of use. If you lend money to that person, you rely on his ability and willingness to pay back. The borrower has to repay the amount, but they don’t offer any collateral, such as a tangible asset. When the borrower fails to return the amount, you cannot compensate for the loss. Still, investors explore such opportunities because of the high-interest rates. Common areas for such opportunities include flip transactions, transactional funding, and mezzanine financing. You can tap into them because this process is simpler than secured notes, where one has to take care of security and collateral. Due to cost-effectiveness, you can issue these notes quickly. 

Although borrowers stand to benefit more from this, lenders can secure high returns against any traditional investments, like bonds, savings accounts, etc. After all, you get a chance to charge high-interest rates.

Risks of investing in unsecured notes

The borrower’s chance of defaulting can be high, and you lose money because of the lack of collateral. A secured note allows you to resell it to some other investor if you want to use your capital somewhere else. But only a few investors can be interested in unsecured notes. The experts warn about fraud risks. You can track the collateral through a deed in a secured note. In the case of an unsecured note, it’s only the verbal commitment of the borrower that they will pay.

Suppose a borrower convinced you by saying that you will get your 18% interest rate but uses the sum after flipping a house for their personal needs. You can take the help of the state attorney general and get that person arrested for fraud. But your IRA will not get the invested money back.

To be precise, the risks with unsecured notes are high and damaging. You can lose some of your retirement savings with one wrong decision. Before taking any such step, weigh your option well.