Definition of Promissory Notes
A lender may require a borrower to sign a promissory note. However, this legal document cannot guarantee repayment, and the terms of the contract must follow the laws of the jurisdiction where it was signed.
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Definition
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Promissory notes are documents that outline the terms of a debt transaction. This note may provide information such as the parties involved, applicable interest rates, what the debtor received in return for signing the form and any clauses that might alter the terms of the promissory note.
Benefits
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Having a promissory note can alleviate any misunderstandings about the terms of an agreement. Also, this will make it clear and official for the IRS that the debt is a loan and not a gift for tax purposes.
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Considerations
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Transactions involving business, education or auto loans may use promissory notes. However, a person who lends a friend or relative money can also use a promissory note to establish repayment terms and conditions.
Misconceptions
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Debts that are detailed in promissory notes are not secured. This means that if a borrower declares bankruptcy, this debt will only be paid after the "secured creditors" receive their money.
Warning
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Promissory notes are not a uniform legal document. Each state governs the legality of a promissory note differently. If the terms of the note are found to be in violation of state law, the lender can face criminal charges.
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