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Definition
An unsecured loan is an extension of credit or a promise to pay
between one or more parties and another or other parties. Unlike
a secured loan, there is no collateral supporting the obligation
in the event of default by the borrower.
Types of Loans
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Unsecured Loan between an IRA and an Individual
When an unsecured loan is between an IRA and an individual,
it is only the reputation and creditworthiness of the borrower
(individual) that the lender (IRA) is relying on for repayment.
As a result, unsecured loans are much higher risk than secured
loans and for this reason they are most common between family
and friends. With IRAs, however, there are restrictions for
certain intra-family transactions (click here for prohibited
transactions).
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Unsecured Loan between an IRA and an entity (LLC, C-Corp,
etc.)
Unsecured loans between an IRA (as the lender) and a corporation
(as the borrower) are even more rare than personal loans, because
an entity doesn’t have to stake its personal reputation on the
line. However, they are more vulnerable to lawsuits in the event
of default. In addition, care must be taken to avoid lending to
a company that is owned 50% or more by "disqualified persons"
(e.g. direct relatives and the spouse of the IRA owner and including
the IRA owner's personal stake in the entity at teh time of the
IRA's investment).
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