Different Types of Promissory Notes
What is a Promissory Note?
A promissory note is a document that records a promise to pay back money which has been loaned. The party making the promise to repay is known as the debtor, and the party loaning the money is called the creditor or lender. Promissory notes can be used any time a loan is made, for the purpose of securing the payments. In fact, any loan should be recorded in a promissory note, even if it is a simple loan from a friend or family member.
The legal effect of a promissory note is similar to that of a contract, in that the debtor is legally bound to hold to their promise as recorded in the note. A “default”, or failure to make payments can result in several unwanted consequences such as a lawsuit or bad credit.
What are the Different Types of Promissory Notes?
There are several different types of promissory notes, depending on the type of loan that was issued. A thoroughly written promissory note should include: the amount for repayment, terms of repayment, any amount of interest charged, and what should happen in the case of default.
Promissory notes are most commonly used in for mortgages and trust deeds in connection with residential property transactions. The different kinds of promissory notes include:
- Personal Promissory Notes: These are used to document a personal loan from a friend or family member. Although many people tend to avoid legal writings when dealing with trusted acquaintances, the use of a promissory note actually demonstrates good faith and effort on behalf of the borrower.
- Commercial: Promissory notes are almost always a requirement when dealing with commercial lenders such as a bank. Most commercial promissory notes are similar to personal notes, although they can be stricter. If the borrower defaults, the commercial lender is usually entitled to immediate repayment on the balance. Further default can result in a lien being placed on the borrower’s property in order to obtain payments
- Real Estate: These are similar to commercial notes with respects to the default consequences. In this case, the lien would be placed on the home; if a mortgage is involved, the information will become public record and can affect the borrowers credit and/or purchasing abilities in future transactions
- Investments: In a business setting, promissory notes are sometimes exchanged in order to raise capital. The note functions much like currency, as it has legal value and can be traded. Promissory notes for investments often involve statements dealing with returns of investment for a certain time period
Thus, promissory notes are useful and necessary tools that are beneficial for both the lender and the borrower. With a promissory note, the lender gains additional assurance that their loan will be repaid in a timely and legitimate manner. For the borrower, the note can provide incentive to avoid defaulting on the scheduled loan payments.
What happens if I Default on a Promissory Note?
Promissory notes are legally binding documents, even if they are considered to be negotiable. “Negotiable” simply means that the document may be altered by a later agreement, and changes must usually be enforced by further monetary consideration. However, any agreements currently recorded in the promissory note must be honored by both parties.
If the borrower defaults on the note, it can have several consequences. First, the lender may initiate a lawsuit in order to force the debtor to complete the payments. In some instances, defaulting on one payment can result in the debtor collecting on the entire balance. For example, suppose the lender made a loan of $10,000 to the borrower, and the borrower has already made payments totaling $5,000. If they default on the next payment, the borrower may be legally entitled to collect the remaining $5,000 immediately.
Next, defaults can result in a lien being placed on the borrower’s property if they still cannot come up with payments. Additionally, if the default was made with a malicious or criminal intent, the debtor may become subject to penalties under criminal laws.
Finally, failure to fulfill a promise recorded in a promissory note can result in poor credit scores. Violations can even affect other areas of life such as child custody rights, especially for repeated or habitual defaults.
Do I Need a Lawyer for Claims regarding Promissory Notes?
Consult a Lawyer - Present Your Case Now!
Last Modified: 10-19-2011 03:23 PM PDT
