What you should know about promissory notes

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.

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. The notes are also used with unsecured loans, such as credit cards and health care financing plans. They are necessary when granting personal loans between friends, relatives or business partners.

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 contracts. Anytime people prepare their own notes, it’s a good idea to hire a lawyer to review the form to make sure it’s legally binding.

People who sign IOUs should read the fine print before signing the agreement. Almost everyone skips reading the legalese, 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: Promiser, Promiser, 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.

mandatory reference is made to the person responsible for paying the loan facilities. In most cases, Debtor is the same as Promiser, but there are times when someone else takes responsibility for 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 those mentioned receive for the conclusion of the contract. An example could be when banks provide financing for real estate loans. The mutual consideration for the Promisor would be the interest they receive against the loan, while the real estate would be the benefit for the Promisor.

Anytime you’re dealing with owner-financed real estate contracts, it’s a good idea to work with a law firm. These include: deeds of trust transferable by seller, for sale by owner, and any other contracts involving financing provided by 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 required whenever people raise business capital and seed funds. Investors and banks issue investment notes to acquire a guaranteed redemption 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 arrangement is ideal when short-term loans are provided. People often forego having their loved ones sign an IOU, but this can be a huge mistake that leads to damaged relationships.

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

Acceleration clauses are almost always included in bank loans. They include legalese that holds Promisors 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.