Promissory Note: Everything You Should Know
Whenever you lend your friend a huge sum of money, you do so with trust, expecting prompt payment as agreed. However, the terms of your transaction may be unclear, leading to a breach of the agreement.
As a result, you may lose trust in your friendship and break it altogether. That’s where a promissory note comes to help. It acts as a legal record of your transaction, protects your interest, and ensures the borrower pays you.
Read for more about general promissory notes and how to get a free promissory note template or sample form online.
What Is a Promissory Note for Loan Payment?
It is a legally binding agreement written as a promise to pay a specified amount of money on said date or upon demand. A promissory note for payment is a negotiable financial instrument with legal rights and responsibilities that bind the lender and the borrower.
In addition, it specifies the consequences should the borrower not pay the outstanding debt. The note, therefore, outlines basic terms relating to debt as follows:
- Due date
- Penalty for default
- Interest rate
- Payment schedule
Promissory notes may come in different forms, depending on the transaction. They can range from a simple agreement with a friend to a complex and detailed mortgage transaction.
Generally, simple promissory notes are of two types: secured and unsecured.
Like many bank loans, a secured promissory note for loan payment has provisions for collateral such as goods, property, or services. Should the borrower fail to pay, you can legally seize the property or asset listed as collateral security. When creating a note, make sure the borrower’s collateral is more or equal to the amount borrowed.
An unsecured note has no collateral security, implying that you’ll have no asset to seize if the borrower fails to pay. Instead, you’ll file a legal claim in court to recover what you lent.
Purpose of Creating a Promissory Note
A promissory note ensures your borrower pays you back. Thus, it provides a way to hold the borrower accountable and protect you against non-payment. It can be used for the following common purposes:
- Promissory notes for real estate transactions; purchases, sales, and down payments.
- Promissory note for private loans among friends, family, and colleagues.
- Student loans.
- Business loans for start-ups.
- Promissory note for Automobile loans like buying a car, paying vehicle loan installments, etc
- Debts and bills.
Elements of a Generic Promissory Note
The Negotiable Instruments Act recognizes a promissory note as a legally binding document. Thus, the court can enforce the document based on the terms and conditions. Before then, it should contain the following vital elements:
The note specifies the names of the lender and borrower, an individual or a corporation. Other relevant information such as address or occupation also forms part of the identification information.
If you decide to have a guarantor for your debt, you should include the name and address of the guarantor.
Principal and Interest
The note specifies how much money you lend and at what interest rate. If there’s a penalty for late payment, it should also appear under the clause.
Sometimes, the borrower may wish to include an asset as collateral security. The details of the collateral should thus be precise in the agreement.
A note includes a detailed strategy of how and when to pay the outstanding amount. If the borrower pays in installments, the note should include the installment amount and the date to make the final installment.
A default clause contains your rights as the lender in case of non-payment. Here, you’ll specify whether to follow a legal process or seize the collateral to recover your money.
The borrower has the legal duty to include a signature in the promissory note. If the borrower has a guarantor, the guarantor’s signature should also appear in the document.
Do you wish to write a promissory note? Download a free promissory note form template from our website today. We provide free sample promissory notes contracts for rental agreement, housing loan, personal loan or for real estate transactions.