Promissory notes are used to provide a written promise to pay with personal loans and bank financing. If the borrower defaults on their loan, the agreement is used to provide evidence that money is owed to the lender.
Promissory notes can be used with virtually any type of loan. They are always attached to mortgage notes and loans that use collateral to secure financing. Notes are also used with unsecured loans, such as credit cards and health care financing plans. They are necessary when personal loans are granted between friends, relatives or business associates.
People can prepare their own promissory note using templates included with word processing programs or downloaded from the Internet. Another option is to use online legal services like LegalZoom to create loan agreements. Whenever people prepare their own notes, it’s a good idea to hire an attorney to review the form and make sure it’s legally binding.
People who sign promissory notes should read the fine print before signing the agreement. Almost everyone skips reading the legal jargon, but it is imperative to understand what is written. Otherwise, a person could end up agreeing to something that has financial or legal consequences.
Promissory notes include specific terminology that describes the people involved and the circumstances of the loan. The five most important terms are: Promisor, Promisor, Debtor, Obligor and Mutual Consideration.
Promising refers to the individual who borrows money and is responsible for repaying the loan.
Promise refers to the person or entity that grants the loan.
required reference is made to the person responsible for paying the loan facilities. In most cases, Debtor is the same as Promisor, but there are times when someone else takes responsibility for the payment.
Required identifies the person or entity to which the Debtor is contractually obligated. This is normally the Promise, but certain situations can make this a different person.
mutual consideration describes the value that the aforementioned receive for the conclusion of the contract. An example might be when banks provide financing for real estate loans. The mutual consideration to the Promisor would be the interest they receive against the loan, while the real estate would be the benefit to the Promisor.
Whenever it comes to owner-financed real estate contracts, it’s a good idea to work with a law firm. These include: transferable deeds of trust by seller, for sale by owner, and any other contracts that involve financing provided by owners.
Real estate notes and land contracts are often secured with negotiable notes. This type of agreement must comply with the conventions of the Uniform Commercial Code (UCC).
Notes are necessary whenever people raise business capital and seed funds. Investors and banks issue investment notes to acquire a guaranteed repayment date. Investors sometimes sell notes to another private investor and use the funds to invest in other notes or financial products.
A simple promissory note is often used between family and friends. The deal is ideal when short-term loans are provided. People often give up on having their loved ones sign a promissory note, but this can be a big mistake that leads to damaged relationships.
Each type of note must include details of the loan agreement. These include: loan amount; interest rate; payment amounts and dates; maturation date; and acceleration clause.
Acceleration clauses are almost always included in bank loans. They include legal jargon that holds Promisor responsible for costs associated with a loan default, such as court filings and legal fees. Once again, it is vital to read everything on the promissory notes before signing. If necessary, hire a lawyer to explain the content.