Promissory Note - Why Not Using One is Foolish
Not using a promissory note can be a costly mistake. If you're thinking about making a loan for personal reasons or business loan, it's essential to put the terms in writing to minimize the chances you could have a future disagreement or wind up in court. Even when you completely the trust the other party to repay a personal loan or loan for business purposes, an oral agreement can be an invitation for trouble. When an oral agreement rather than a written promissory note form is used, there can be misunderstandings about the interpretation of the terms, or a conflict due to fading memory over time. If you've ever played the telephone game, you know that something said can change drastically from ear to ear even without a passage of time. Therefore, a promissory note template can avoid such differences and misunderstandings over terms of a loan agreement by clearly defining the important details, like interest rate, late payment penalties, and payment timeframes. A written promissory note provides concrete evidence of the loan terms if a question ever arises.
Types of Promissory Notes
A variety of sample note forms can be used. Some examples include:
- Balloon note - A balloon note provides for smaller installment payments in the beginning and a larger payment toward the end of the loan term.
- Demand note - This type of promissory note form requires payment in full upon a demand by the lending party. There is no fixed timetable for repayment. The borrower may have an option to pay before demand is made. It differs from an installment note, in which payments are made at regular intervals.
- Secured or unsecured promissory note - Notes payable with a security interest provide for some form of collateral that can be taken by the lender in the case of default in payment. A mortgage loan is a common example of a secured loan.
- Master promissory note - This can be used to make a series of loans over an extended time period.
Some people are hesitant to use a promissory note sample when creating a personal loan agreement out of fear that the other party will be offended when requesting a signature be signed on a loan agreement template. However, it may be even more crucial to have a written agreement when dealing with personal loans, since a personal relationship can be damaged when there's a dispute. A business loan may also be easier to collect on than a personal loan. When asking others to sign legal notes, you can preface the request by stating that it's a matter of following business practice, not anything personal. If you are uncomfortable about requesting a signature on a sample promissory note, you can assure the other party that this is just how you conduct business. By using a sample of promissory note to make a loan, you are conducting a business transaction, personal emotion needs to kept separate, business is business.
Promissory Note FAQs
What is a promissory note?
A promissory note is a promise to pay money. The promissory note is evidence of a loan agreement and often contains the terms of the agreement for loan. A promissory note, or note payable, may be used for a personal loan or in commercial transactions. It is considered a negotiable instrument under UCC rules unless terms prevent transferring the note payable. The are different types of promissory notes, such as a demand note, balloon promissory note, secured promissory note, unsecured promissory note, and others. US Legal Forms offers a professionally drafted template of promissory note for all situations. A promissory note sample may be viewed before downloading.
Who must sign a promissory note?
Both parties must sign the loan agreement, but only the borrower must sign the promissory note. A witness need not sign, but our sample promissory note forms may be notarized as evidence that the a borrower did validly sign the instrument.
What is a secured promissory note?
A secured promissory note is one that creates an interest in the borrower's property. In case of the borrower's default on the note, the property the note payable is secured by can be sold. This is in contrast to an unsecured promissory note, which creates no such security interest in the borrower's property.
What is a balloon promissory note?
A balloon promissory note for loan is an instrument that calls for a series of smaller installment payments and then a large payment toward the end of the loan term. It is a type of installment note in which a large sum is paid toward the end.
What is the maximum interest rate I can charge a borrower in a promissory note form template?
The maximum interest rate that can be charged to a borrower is set by state usury laws, which vary by state, so local laws on interest rates need to be consulted.
What can I do if there is a default on a note payable by the borrower?
Notes payable are evidence of the loan default that can be used in a breach of contract lawsuit. Some notes payable contain a cognovit note provision, in which the borrower waives any defenses that could be raised. For a small personal loan default, a lawsuit may often be filed in small claims court.
What is a master promissory note?
A master promissory note is one that can be used to make multiple loans, covering the time frame specified in the promissory note template. A master promissory note is often used in the context of student loans.