Promissory Notes

A promissory note is a record of a promise to pay back money loaned from one person to another. The party offering the promise to repay is the maker of the note or the debtor. The individual loaning the money is the holder of the note or the creditor. Promissory notes are produced when a loan is made to document the agreement to reimburse the loan. The legal effect of a promissory note is comparable to a contract in that the debtor is legally obliged to honor the promise as written in the note. Failure to make payments, also known as default, can result in various undesired outcomes such as repossession of a home or property, bad credit, or a lawsuit.

Parts of a Promissory Note

A comprehensive promissory note should include the following:

• Amount of repayment
• Repayment terms
• Interest rate
• Default penalties

Promissory notes are frequently used for trust deeds and mortgages associated with residential property transactions.

Types of Different Promissory Notes

The different kinds of promissory notes depend largely on the origination of the loan. The classifications of promissory notes include:

• Personal Promissory Notes: These are used to record a personal loan from a family member or friend and demonstrate effort and good faith on the part of the borrower.
• Commercial: Comparable to personal notes, these can be more stringent. For instance, if the borrower is delinquent, the commercial lender is normally entitled to immediate repayment of the entire balance. A default can also result in a lien on the borrower’s real property to collect payment.
• Real Estate: This type is similar to default consequences of financial notes, although in this circumstance, a lien is placed on a home or other real property. If a default on a mortgage results in a claim, the details become public record and can affect the credit rating of the borrower and future purchasing abilities.
• Investments: Promissory notes in a corporate setting may be transferred to appropriate capital for the business. If this kind of note is a contract interest, it is regulated by securities laws. These notes frequently contain clauses outlining returns of investment within a specified period.

Promissory notes are necessary and useful tools that are advantageous to both the borrower and lender. With a promissory note, the lender obtains added insurance that the loan will be paid in a legitimate and timely manner. The note can provide valuable information for the borrower regarding essential rights.

Defaulting on a Promissory Note

When a borrower is delinquent on payments outlined in a promissory note that carries an acceleration condition by missing a payment, the full amount of the loan is due regardless of the initial repayment terms. If a borrower neglects to make payments promptly on a promissory note, the holder of the promissory note may give notice of the default to the borrower. If the past due amount is not satisfied, the holder can file a claim to obtain the whole balance of the promissory note in addition to any interest due. Lastly, failure to fulfill a commitment documented in a promissory note may create a poor credit rating. Violations can even affect child custody rights, particularly in the event of chronic or repeated defaults.

Legal Assistance Concerning Promissory Notes

Whenever a loan is originated, it should be documented in the form of a promissory note. Whether you are the borrower or lender, an attorney can help you outline and review the written record. If you have defaulted on a promissory note, a lawyer can help you learn if any protection is possible and can suggest potential solutions to avoid further harm to your credit. If you are a lender and a borrower is delinquent on a loan, an attorney can review your choices for recovering damages.

Legal Disclaimer

The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.