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What is a promissory note? In simple terms: a promissory note is your written guarantee to repay a loan according to certain terms within the promissory note. It is a legally binding document so you should read it carefully and make sure you fully understand the terms before you sign it.
How Can A Promissory Note Be Used?
A promissory note form (or legal document) is a detailed and written personal promise to repay money to somebody else. A promissory note can be used to create a legal and binding agreement when lending money or even financing the sale of personal items and real property. A promissory note payment can be scheduled to fit your specific needs and requirements. It's a matter of simply setting out the terms and conditions of the loan in an "unsecured promissory note" or a secured promissory note. Important things to consider are: "how much is going to be loaned, the amount of interest and rate (if any at all), the rate of repayment you wish to schedule", and the security interest. You can even have the entire amount become due and payable on a certain date. The promissory note forms you will find on this site are set-out in plain English so that you can insert the specific terms and conditions for the promissory note by simply filling in the blank spaces.
Essential Elements Of A Promissory Note
When preparing a promissory note you should ALWAYS pay close attention to the proper description and statement of the parties. In addition, the "name(s)" of the person(s) or business entities, and/or in some instances "both" which are going to be part of the promissory note. This may seem like general information but it's really important that you get the proper description (and statement) of the parties perfectly correct the first time. Consider this: you may not in (everyday speech) address someone quite so formally in conversation or say in a business letter for example. This is the case if it's somebody you know really well. However, you should still insert in the contract their "complete name" instead of just a "shortened version." For instance, type and/or write "Dr. Peter J. Jones" instead of saying "Pete Jones." In the unlikely event your contract ever gets involved in litigation then having the correct (and, full) name of the parties is crucial!
The Functionality Of A Promissory Note
The functionality of a promissory note is to outline in detail the specific amount and terms of a loan and in addition, to provide signed evidence of the receipt of the loan proceeds, and the actual commitment by the borrower to repay the loan completely. In the case of a commercial bank loan, the promissory note will also include a detailed "repayment amortization schedule" and will outline the total amount of interest including the principal payments over the life of the loan.
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Types Of Promissory Notes
There's many types of promissory notes, almost as many as there are reasons for taking out a loan in the very first place. In most cases, borrowers will use a promissory note to finance a home or automobile, to start, run and even to expand a business, and of course, in every day life the buying of goods and services where a person uses his or her credit card.
Professional "Insight!"
There is also an active secondary market in private and personal promissory note loans. A person selling a home or a piece of property will oftentimes extend a "private second mortgage" to a buyer so as to make his or her home much more affordable. The promissory note duly dated and signed between say the buyer and the seller is in real terms worth considerable cash in the marketplace which is known as "discount paper." However, the seller will need to accept less than the face value of the promissory note, but he or she will be in a position to cash out, and not have the worry about collecting on the loan payments which in itself can be more often than not a real headache at times.
Secured & Unsecured Promissory Note
A promissory note can be both secured and unsecured. Secured promissory notes are usually backed by a form of collateral put forth by the maker. This can be in the form of real estate, an automobile or a even a luxury boat. If and when a maker defaults on a loan, the payee where a secured note is in place has the peace of mind that a legal attachment to the collateral is always possible. However, unsecured notes offer no collateral whatsoever. Such notes are oftentimes used in more informal cases of persons loaning one another a small amount of money. An unsecured promissory note will always be outdone by secured liens; if in the unlikely event that a maker defaults. The payee of an unsecured note will oftentimes have to wait untill other secured creditors are paid before he or she can secure payment on their unsecured note. When you consider this, the payee of an unsecured note is wise not to loan an amount of money than he or she is willing to lose.
Potential Problems With Usury Laws
There is a dilemma the payee could encounter and that is to do with State usury laws, which can vary greatly from state to state. These usury laws relate in a different way to say commercial banks than they do to private persons who lend money. Usury laws place a legal cap on the interest rate that the payee is permitted to charge. Interests rates in some cases can break state usury laws, and can carry both civil and criminal penalties. However, more recently it's been the maker (not the payee) who has had to watch out with promissory notes. Corporations use promissory notes as a "tried and true method" of raising capital. However in the case of a note between person-to-person is often a less fancy agreement, but the corporation-to-individual promissory note is in most cases much more complex. It's for this specific reason that corporate promissory notes are for the most part sold not to the public but instead to more sophisticated buyers who are quite capable of carrying out their own due diligence. Such promissory notes are more often than not classified as securities, and anybody trying to sell them on behalf of a corporation must be registered with the "Securities and Exchange Commission" or an equivalent State department.
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