Frequency Asked Questions About Promissory Notes

Frequency Asked Questions About Promissory Notes

Personal promissory notes are the most common form of note payable and can be used when lending or borrowing money from friends or family, or to document the intended purchase of personal belongings such as jewelry, appliances, or vehicles. Depending on the amount of the loan, the lender may also request some sort of collateral to back the note.

When drafting the note it should clearly state how much the loan is for, the amount of interest being charged, and the dates which payments should be made. Most states have laws regarding the amount of interest lenders can charge.

When borrowing money from a bank or lending institution, a promissory note is almost always required. If the borrower defaults on the loan the lender has the right to demand full payment of the note. If the lender is unable to collect on the note they can place a lien against real property owned by the borrower or have their wages garnished. If this occurs, it will have a negative impact on the borrower's credit report.

Promissory notes that are considered "unsecured". This means that if the borrower defaults on the loan it is more difficult for the lender to collect. Although lenders can file a lien against the property and take legal action against the borrower, collection can be a lengthy and expensive process with no guarantee for repayment.

Why use a promissory note? Even though a lender trusts the borrower in good faith that he will be repaid, it is always good practice to get it in writing. Oral agreements can be misinterpreted or misremembered. Promissory notes are clear about the interest rates, due dates, late payment penalties, and other possible terms. A promissory note is also solid evidence that a loan has taken place, in case there is a dispute.

Types of Promissory Notes

Promissory notes come in a variety of types which may include:

• Balloon note. A promissory note that requires smaller payments early in the term of the loan and a large payment at the end of the loan term.

• Demand note. This type of promissory note has no fixed timetable for the payment of loan. It requires full payment of the loan upon demand by the lending party.

• Secured or unsecured promissory note. A secured note includes collateral which may be claimed by the lender upon non-payment. One of the classic examples is the mortgage loan where the home is provided as collateral is provided in case the loan is not paid.

• Master promissory note. Refers to the series of loans that can be made using this type of promissory note over an extended period of time.

Some people may feel offended when asked for a written promissory note. It is however, important to have a written agreement when dealing with personal loans because the relationship can be damaged when disagreements arise. Business loans on the other hand, can be easier to get in writing because it is less personal.

FAQ's on Promissory Note

• What is a promissory note?

A promissory note is evidence of a loan agreement that contains the terms of the agreement for the loan. This note also contains the promise to pay the loan on the agreed date. This promissory note or note payable can be used for a personal loan or commercial transactions.

• Who must sign the promissory note?

A loan agreement is signed by both parties but only the borrowing party needs to sign a promissory note. A witness need not sign but the note can be notarized as evidence that the borrower did sign the document.

• What is a secured promissory note?

Collateral, such as an interest in the borrower's property, is included in the promissory note. In case of a default in payment, the property can be sold to pay the lender.

• What is balloon promissory note?

This is a type of installment note where a series of smaller installment payments are made and a large payment is required towards the end of the loan.

• What is the maximum interest rate I can charge the borrower in a promissory note?

Usury laws dictate the maximum interest rates that can be charged by the lender to the borrower. This varies by state and local laws on interest rates should be checked.

• What can I do if there is a default on the note payable by the borrower?

You may choose to sue the borrower in small claims court. Promissory notes can be used as evidence of the loan default that can be use in a lawsuit related to breach of contract. A cognovits note provision can be included in which the borrower waives any defenses that could be raised by the lender.

• What is a master promissory note?

A master promissory consolidates multiple loans. An example of a master promissory note is a student loan where one can make multiple loans covering the time frame specified in the promissory note outline.