What Is a Promissory Note?
A Promissory Note is a legally binding document that outlines how much money the lender gave to the borrower and the structure of repayment. Whether you get a mortgage, take out a student loan, car loan, or a personal loan, you need to create a Promissory Note to have evidence of the loan and protect both parties who signed the note from any misunderstandings in the future. This document is not very complicated or long, yet it is enforceable and is usually prepared by family members and friends without the help of a professional lawyer since there is no need to have any legal knowledge to properly draft this legal instrument.
There are two main types of Promissory Notes:
- A Secured Promissory Note is a document that secures the loan by a property – typically, a vehicle or real estate. Essentially, it means that if the borrower fails to pay the money back, the lender is within their rights to seize the property described in the Promissory Note as a reimbursement of the loan. This property has a significant value and this way the lender has a better guarantee of future payments. A Secure Promissory Note is the best choice for a lender and is often used when a large sum of money is being borrowed;
- An Unsecured Promissory Note is a document that does not list any property to secure the payment. In case of a non-payment, the lender can file a lawsuit to satisfy the loan, and if the borrower does not have enough assets or files for bankruptcy, the lender’s money may be lost. Only use this type of a Promissory Note when lending a small amount of money to someone you know well.
If you are looking for a Promissory Note template, you can download one below.
What Is a Master Promissory Note?
A Master Promissory Note is a document signed as a promise to repay the student loans and related fees and interest to the Department of Education. It must be completed before you can receive any Federal Direct Loan funds to pay for your education. This type of a Promissory Note describes how much money you will owe, calculates the interest, and states when the interest is to be charged. It will also provide information about available repayment plans and options to cancel the loans. Generally, a Master Promissory Note is signed once for various subsidized and unsubsidized loans, because it is valid for up to ten years of education. Unlike a regular Promissory Note, it can be used to borrow many loans over a period of several years.
How to Write a Promissory Note?
Follow these steps to compose a Promissory Note Form:
- Identify the lender and borrower, write down their mailing addresses and other contact information;
- Indicate the principal loan amount in words and numbers;
- Calculate the interest rate - the fee for taking out the loan. Check the laws in your state - each state has a maximum amount of interest rate that can be charged;
- Decide on a payment schedule. Add the date when the full loan balance, including interest, is due. Determine whether the borrower has to pay the loan in installments or using a lump-sum payment. If you choose the first option, specify how often the borrower pays money - once a week, a month, a quarter, or a year;
- Record a late fee amount in case the borrower does not make the payments on time;
- Make your Promissory Note secured if you want to add extra security to the loan. Specify the property that will be transferred to the ownership of the lender if you do not pay back the loan;
- Obtain consent of another person to pay back the loan if the original borrower is unable to do so - a co-signer must agree to the obligations and liabilities indicated in the note;
- Print your legal names, sign and date the document.
What Makes a Promissory Note Invalid?
Like any other legal instrument, a Promissory Note can be considered invalid and voided. To be legally enforceable, it must have all the essential terms and conditions – the exact loan amount, repayment schedule, signatures of the parties that verify the intent to enter into this transaction. The last part is especially important – the court will consider your Promissory Note invalid if the identity of the borrower is not explicitly verified. If you refer to outdated laws to calculate the interest rate, for instance, it will render your note invalid. Additionally, if you cannot find a note or its certified copy, you cannot prove your case as a lender and collect the money, since this is the only piece of paper that confirms the loan.
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