One of the most important concepts to understand when investing in promissory notes and other debt instruments is whether and how such debt is “secured.”
The most frequently-used types of debt are unsecured— like using a credit card. If any debts are unpaid, the lender (or creditor) has no direct recourse to seize money or assets from the borrower. Because these lenders/creditors are often taking greater risk, they generally demand higher interest rates for the debt they hold.
Secured debt, on the other hand, is that in which the lender insists on some type of collateral that, in the instance of a default, can be claimed by the lender as a recourse for their losses. In the instance of secured promissory notes, lenders generally offer a deed of trust (or commit to creating one) that ensures that the lender will be able to force a sale of the underlying asset (namely the real estate property) in order to get the money she or he is owed. Lenders that have this recourse (think banks that provide mortgages) will generally settle for lower interest rates.
Recognizing this trade-off, and that some investors want a higher return in exchange for trusting the borrower’s reputation and commitment, while other investors are ok with a lower return in exchange for the “security blanket” of a defined pathway to recovering unpaid debt, Coldstream Partners is happy to offer both types of product, at discretion of the investor. Reach out to us at email@example.com to find out more!