Promissory Note Information
A Promissory Note is also known as:
- Personal Note
- Loan Agreement
- Notes Payable
- Promise to Pay
- Secured/Unsecured Note
- Demand Note
- Commercial Paper
What is a Promissory Note?
A Promissory Note is a legal form that documents a loan between two parties. It enforces a borrower's promise to pay back a sum of money to a lender within a specific time period.
Common uses for a Promissory Note:
- Private or personal loans between family members, friends or colleagues
- Student or educational loans
- Real estate loans, mortgages, or property down payments
- Bank loans
- Commercial or business loans
- Car or vehicle loans
Should I use a Promissory Note or Loan Agreement?
A Promissory Note is generally used for straightforward loans and basic payment terms. A Loan Agreement is used when a more complex payment plan is needed. Whichever you choose depends on the terms you wish to include and your personal situation.
How to create your Promissory Note:
Identify the lender and borrower. The lender may be a corporation or individual.
Choose a schedule for when the loan needs to be repaid, including how the borrower will make his or her payments and how often. Payments can be made weekly, monthly, or yearly.
While the loan amount may be straightforward, you will need to decide whether to charge interest and if it will be compounded monthly or yearly.
As part of your Promissory Note, there may be an option to include collateral or security. Collateral is protection for the lender against a borrower's default. If the borrower defaults, the lender can become the owner of the collateral or sell it to pay the outstanding amount. Collateral may be a vehicle, jewelry, or other assets worth the equivalent or more than the loan itself.
Amendments to the Loan Agreement can only be made if both the lender and borrower agree to change the terms.
Once complete, the loan contract should be signed by both the lender and borrower to bind the terms.
After the terms are signed, the borrower is expected to make payments regularly according to the agreement. If the borrower defaults on a payment, the lender may demand the whole amount immediately as well as charge a higher interest rate until the lender is paid.