Nothing is worse than lending out money and not having a guarantee that you will get it back. This was the case until promissory notes were established. A promissory note is used to secure a debt that a lender loans a borrower. Not only do promissory notes require a borrower to repay a loan, but the note specifies any additional wants the lender and borrower may have. Repayment dates, amounts and other options are all determined by both legal parties. Once both parties enter into the agreement, the terms of the promissory note are legally binding.
Written & Verbal Signature
In order for a promissory note to be valid, both the lender and the borrower must sign the documentation. If you are a co-signer for the loan, you are required to sign the promissory note. Being a co-signer requires you to repay the loan amount in the instance that the borrower defaults on payment. The terms listed in the documentation are the only terms that the borrower or lender must agree to, unless both parties sign another agreement with the additions or amendments. Most promissory notes are typically written agreements, however a verbal agreement is also legally binding. The only issues with verbal agreements is proving that both parties were in a mutual agreement, the amounts of the loans and the terms.
Loan Amounts, Fees & Interest Rates
All promissory notes are required to provide the original amount of the loan and the interest rate. The interest rate can be fixed or variable, which depends on the terms of the lender. With a fixed interest rate, the rate does not change over the time period of the note. A variable interest rate can rise up and down. The promissory note must include any clauses that can change the interest rate. For instance, if you agree to a fixed rate but default on your loan, the lender can change the interest rate if you agreed to this term in the original note. In addition to interest rates, the promissory notes must list any fees that you the borrower are to pay if you default on the loan.
A payment schedule must be listed in a promissory note. The type of payment schedule depends on the type of promissory note that is being used. There are several types of promissory notes, including Installment Notes, Open-Ended or Revolving Note, Demand Note and a Simple Note. The type of note a lender and borrower are required to use depends on the type of loan. With a Simple Note, one lump sum payment is made. Installments Notes require borrowers to pay the entire loan back in agreed-upon installments. A demand promissory note requires the borrower to pay the loan back at any time the lender demands. Open Ended Notes are typically lines of credit, in which the borrower can continue to use and repay at the digression of the lender. You are required to repay the loan according to the type of promissory note you sign.