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What Is a Promissory Note? What Are They Used for?

A promissory note is a written contract between parties-a borrower and a lender– signed by the borrower. It contains an unconditional promise to pay a certain amount of money on demand, or in installment payments over a period of time. It is used in a financing transaction – a lending transaction.

The individual who promises to pay is the maker (borrower), and the person to whom payment is promised is called the payee or holder (lender).

The loan transaction can be secured or unsecured. A secured loan has specified property pledged to cover the repayment if the borrower defaults on making the payments. Another form of collateral security is a co-signor. A co-signor, or a guarantor, is a person who agreements in writing to repay the debt if the borrower defaults. This means that the holder (lender) protects his financial interest by using the maker's collateral security or the maker's co-signer.

If the maker fails to pay according to the agreement, the holder can foreclose on the property that secured the repayment promise, thereby recovering the unpaid principal accompanying plus, interest, fees and expenses.

If the promise is unsecured by any additional collateral, and only by the borrower's signature, it is called an "unsecured" loan. The holder's recourse if non-payment occurs will be through a debt collection process against the borrower

A promissory note document usually contains additional terms such as the right of the holder to order payment to be made to another person, penalties for late payments, a provision for the borrower to pay attorney's fees and costs if there is a legal action to collect, the right to collect payment in full if the loan is secured by real property and the property is sold ("due on sale" clause), and whether the note is secured by a mortgage or deed of trust or a financing statement (a filed security agreement for personal collateral).

Types of Promissory Notes and their…

Read More…. by Lawrence Tepper

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