Borrowing and borrowing money is something most of us will do at some point in our lives. Whether it’s a formal loan from a bank or a loan between friends or family, loan records help ensure that all borrowers are ultimately repaid.
If a large amount of money is exchanged informally, such as lending your sibling some cash to buy a car or helping a friend pay their rent, a verbal agreement is not enough. In contrast, a legal document like a promissory note holds both parties accountable for their role in the transaction.
What is a promissory note?
A promissory note is a legally binding contract in which one party promises to pay another party a fixed amount, either periodically or in full, by a specific date. The note contains all the details about the loan, such as the amount, interest on the loan, maturity date, and payment schedule.
The lender does not have to sign the promissory note, but the borrower does because it is a written record of their promise to repay the loan. Because a promissory note is legally binding, it’s important to make sure all details are correct before the borrower signs it.
Even if the loan is between friends or relatives, working with an attorney is your best option.they use Legal document drafting software Make sure the relevant details are included in the contract and include the necessary signatures to make the promissory note binding.
When to use promissory notes?
A promissory note can be used for any type of financial loan, either as a stand-alone document or as part of the paperwork required when borrowing a large amount of money. Bulky items. Both personal loans and business transactions use promissory notes to provide legal protection to the lender.
The most common uses for promissory notes are:
- real estate. As part of the mortgage documents for a home or business investment, the buyer signs a promissory note indicating their obligation to repay the funds used to purchase the property.
- Student Loans. When someone applies for a higher education loan, they fill out a promissory note as a promise to repay those funds. Federal loans typically allow students to sign a master promissory note covering all loans the student takes out over the next 10 years.
- Commercial Equipment Procurement. A committed loan comes with any loan a business takes out to finance necessary operating equipment. As with personal loans, these notes state that the business is responsible for repaying it in full by a specific date.
- Working capital. Some businesses may apply for loans to support their operations, especially during the off-season or when starting a new company. This money serves as a fund for basic day-to-day expenses until income can replace it. These loans have their own promissory notes.
Many people choose not to use a cashier’s check when borrowing money from friends and family, even for large amounts of cash. However, this is a risky move, and there’s no guarantee you’ll receive the money again. Without a cashier’s check, there’s nothing you can do if they don’t pay you back.
For small amounts, a note is usually not required. But for money you’ll miss out on if you don’t get it back, a cashier’s check can solve that problem nicely.
Types of Promissory Notes
Depending on the type of loan, you’ll need different types of promissory notes to set the repayment terms for the borrower.
simple
This is the most basic type of promissory note and is typically used for small loans to a single borrower. If two people exchange money, all they need is a simple note. The details contained in a simple promissory note can be boiled down to the amount, repayment terms, payment schedule and the names of the people involved.
open
An open promissory note is more like a line of credit than a traditional loan. Borrowers receive only a portion of the full amount upfront, but they can collect additional money later if they need more funds when repaying the original borrowed amount. This is easier to manage than applying for multiple loans with different promissory notes.
master
If a borrower requires multiple loans, they and the lender can use a master promissory note as an ongoing agreement. This can cover multiple loans from the same party at a given time, such as a personal student loan.
Guaranteed
Secured promissory notes generally have higher interest rates than other types of promissory notes because something of value is required as collateral as part of the loan. If the borrower fails to repay the funds, the secured note allows the lender to take possession of the collateral in lieu of payment of the balance.
No guarantee
An unsecured promissory note does not require the borrower to post any collateral, but the lender still has legal options if the borrower defaults on repayment.
These promissory notes are common in real estate transactions because the mortgage is used to secure the loan, rather than as any additional collateral. If the mortgage is not repaid, a lien can be placed on the property, allowing the lender to foreclose and recover the funds.
Information contained in the promissory note
The essential elements of the contract should also be included in the promissory note. Depending on the type of note, additional details may be required, but at a minimum a promissory note should contain:
- Lender and borrower contact information. In addition to the signature date, the first part of the promissory note outlines who borrowed the money and who borrowed it.
- total loan amount. The lender and borrower must agree on the total amount of funds to be exchanged.
- coming of age ceremony. This is when the promissory note ends; it is due in full by this date. Some promissory notes may also list this as the “Maturity Date.”
- Fees, interest details and penalties. The fees associated with creating the promissory note are listed here, along with details of the interest rate and any penalties that apply if the borrower defaults on the payment agreement.
- repayment terms. These provide all the information on exactly how the borrower will repay the loan. Most large cashier’s checks are paid in installments, either weekly, monthly, or quarterly. Smaller amounts may be paid as a lump sum before a fixed date.
- Repayment start date. It is important for the borrower to know this date because not all payments begin immediately after the promissory note is signed.
- Governing law or jurisdiction over the instrument. Where the promissory note is signed is very important. If a lender needs to take legal action against a borrower, this information outlines the geographic area or regulatory agency that will oversee the legal process.
- Borrower’s signature. Only the borrower signs the promissory note because it is their promise to repay the loan.
If you use a secured promissory note, you must include details of the collateral. The master promissory note also contains more complex information about the term of the note and the types of loans it covers.
How is a promissory note repaid?
Much like a traditional loan agreement, the borrower can repay in a variety of ways. In addition to one-time payments and installment payments, you can also choose on-demand payments and balloon payments.
- Pay as you go. If no specific payment information is listed in the promissory note, the lender can demand repayment in full at any time. This is never recommended for large loans, but may be common in smaller, informal arrangements.
- balloon payment. Some lenders may require the borrower to pay part of the loan in regular monthly installments before making a larger final payment in order to settle the promissory note by a specific date.
Thank you very much – IOU!
A promissory note may feel like an unnecessary step, especially if you are lending or borrowing a small amount of money or simply lending among friends. But it’s important that everyone is protected by the law, so get it down on paper using a legal document drafting tool to make currency exchange quick and easy.
Trying to sign a promissory note with someone far away or just looking for an easier way to digitize the process?and Electronic application platformfilling out legal documents has never been easier.
