What You Should Know About Promissory Notes

The promissory notes are used to provide a written promise to pay with personal loans and bank financing. If the borrower defaults on his loan, the agreement is used to provide evidence that money is owed to the lender.

The promissory notes can be used with almost any type of loan. They are always attached to mortgage notes and loans that use collateral to secure financing. Promissory 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, family or business partners.

Individuals can prepare their own promissory note by 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 is advisable to hire an attorney to review the form and make sure it is legally binding.

Individuals 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.

The promissory notes include specific terminology that describes the people involved and the circumstances of the loan. The five most important terms are: Promoter, Promise, Debtor, Obligation and Mutual Consideration.

Promising refers to the person who borrows money and is responsible for repaying the loan.

Promisee refers to the person or entity that provides the loan.

Debtor refers to the person responsible for paying the loan installments. In most cases, the Debtor is the same as the Promoter, but there are times when someone else takes responsibility for the payment.

Obliged identifies the person or entity to which the Debtor is contractually bound. This is normally the fiancé, but certain situations can make it a different person.

Mutual consideration describes the value that those mentioned receive for the conclusion of the contract. An example might be when banks provide financing for real estate loans. The mutual consideration for the Promised One would be the interest it receives on the loan, while the real estate would be the benefit for the Promoter.

As long as it is owner-financed real estate contracts, it is a good idea to work with a law firm. These include: the seller returns deeds of trust, for sale by the owner, and any other contract that involves financing provided by the owners.

Real estate notes and land contracts are often secured by 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 start-up 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 agreement is ideal when short-term loans are granted. People often forgo having loved ones sign a promissory note, but this can be a huge mistake that leads to damaged relationships.

Each type of note should include details of the loan agreement. These include: loan amount; interest rate; amounts and dates of payment; maturity date; and acceleration clause.

Acceleration clauses are almost always included in bank loans. They include legal jargon that holds the Promoters responsible for costs associated with defaulting on the loan, such as court filings and legal fees. Again, it is vital to read everything on the promissory notes before signing. If necessary, hire a lawyer to explain the content to you.