A promissory note is an obligation to make a payment to someone. Such a document is predominantly used in the financial services industry. Many people may have familiarized themselves with it when applying for any loan. If you decide to lend money to someone, you can use a promissory note template.
Explanation of Promissory Note
A promissory note can be understood as a loan agreement or a debt receipt. It is a document that is legally enforceable. It states that the borrower undertakes to repay the lender the amount of the debt within a specified period of time. This way, it creates a legal obligation to repay the loan.
The promissory note is used for mortgage loans, auto business and consumer loans. You can also choose to lend debt between friends or relatives. When you lend a large amount of money to a person, you can draw up a simple promissory note on a traditional template. It will be a legal document and will protect you from possible risks.
What to Specify in a Promissory Note?
A loan promissory note contains all the terms of use. The basic form consists of such aspects:
- personal information about the lender and borrower (names, addresses, and contact information);
- loan amount;
- payment schedule;
- signatures of all parties.
The collateral that is mentioned in the contract is the property that is subject to confiscation if the loan is not repaid. It is easy to understand this with the example of a mortgage. When you buy a house on credit, it also becomes collateral under this contract.
How to Customize a Promissory Note
Use a simple promissory note sample to quickly create a contract. A simple promissory note is always created according to the transaction. It is helpful to use the sample when you are drafting the contract to have confidence about including all the right aspects. Promissory notes can be of different types.
A promissory note can be designated to pay off an amount in a lump sum on a specific date. For example, if the loan amount is $1,000, the borrower agrees to repay you the entire amount on a certain date. It can be paid in advance of the settlement date and in such a case, there is no need to create a payment schedule. The lender has the ability to determine the amount of interest for that term.
How to Recover on a Promissory Note
When you lend money under a promissory note, the borrower is obligated to repay you according to the specified terms in the contract. Otherwise, you need to apply recovery methods. The main ones include:
- Demanding repayment of the debt in writing. It is the very first thing to do in such cases. A written reminder is sent after a certain time after the late payment.
- Communication with the borrower. Standard promissory note should include conditions about the possibility of making partial payments. In most cases, partial repayment is a good solution to the situation. You can see examples of promissory notes here.
- Contacting debt collectors. It is usually used in extreme cases, when it is not possible to contact the borrower or reach a general agreement to repay the debt. Such a business always works and charges a certain percentage of the amount of the debt. It is also possible to sell the contract to a debt collector and therefore, get the full amount of the loan. If nothing helps, then you should go to court.
A promissory note is a useful way which represents a clear record of the loan. This way, all the terms and conditions are recorded in writing and the contract is legally enforceable.
Types of Promissory Notes
Each promissory letter sample can be used to quickly and correctly draw up a contract. Characteristics that vary between different promissory notes consist of certain conditions and repayment requirements. Let’s take a closer look at the main types of promissory notes:
- Simple. It includes basic information that consists of the amount owed, the terms and conditions for using the contract, and the payment schedule. It is mostly chosen for small loans.
- Secured. Such an agreement consists of the borrower providing a valuable thing as collateral, to protect the repayment and the value of the loan. If the borrower is unable to make payments, fails to fulfill his obligations, the lender takes the collateral.
- Unsecured. It is not necessary to provide any collateral to get a loan in this option. This type of promissory note is a legal contract, so the creditor has all legal grounds to collect overdue payments. This variant of the contract is common in real estate transactions, because the guarantee of the loan is a mortgage, and not a separate collateral, which must be specified in the contract. The unsecured version of the contract consists of a promise by the borrower to pay a certain amount of debt with interest. A mortgage in turn puts a lien on the property, so if the lender defaults on the loan, the lender reserves the right to take the property..
- Basic. It is a permanent agreement that is entered into between the lender and the borrower. It is similar to general service agreements. Such a promissory note provides an opportunity for the two parties to agree on the terms and conditions that regulate loan agreements. It is predominantly used for student loans that are for a short period of time.
- Open-ended. It is a contract just like a credit line. Instead of receiving the entire amount of funds in one installment, the borrower receives it in installments and can repay in a period of time that is agreed upon in the contract. This way, the borrower can draw additional funds that are stipulated in the contract without having to borrow more than was specified by the original terms.
- Demand. The requirements here are simple and it is usually possible to repay the debt in several installments. If the borrower does not repay the amount owed on time, the lender can send a notice of intention to collect and select specific techniques beforehand.
- Balloon notice. It contains the usual information about the requirements for repayment of the loan, but differs in a significant nuance. Instead of an even amount of payments, the borrower repays small sums initially and pays the largest payment at the end. These agreements appeal to small business owners because they provide an opportunity to increase revenue to pay off the debt in full.
You can store contracts and manage your document flow with Pandadoc tools. The software also provides a large selection of different templates with which you can quickly create business documents. Choose the free version to see how well the tool meets your requirements. Since promissory notes have different types, choose the agreement type according to the loan specifics.
