Overview of a Promissory Note
Additionally, a commercial promissory note is one by which a company acts as a borrower. Conversely, a personal loan is secured by the income and assets of the individual requesting a loan. In all cases, lenders will want assurance of repayment. Thus, a promissory note is essential for this.
In essence, a loan can be secured or unsecured. But, in the case of a secured document, additional security documents are required.
What is in a Promissory Note?
Essentially, all loan agreements will contain details around the borrower and lender. As well as the amount that needs to be borrowed, and other terms and conditions for repayment. Importantly, always ensure that the payment details are explicit. Especially in the off-chance that late payments or defaults are a possibility.
Principal or Borrowing Amount
The principal amount to borrow is the actual money that will be lent to the borrower at the beginning of the loan. Then, as the loan gets paid down, the principal balance will update to reflect the balance remaining.
Firstly, the term of the loan specifies how long the loan will be active. Also, how often the loan payments will need to be made. Then, at the end of the loan term, it is typical that the remaining principal of the loan is paid off in full.
Essentially, the interest rate calculates the loan payment to make on the loan term. Interest rates for typical loan agreements are specified as an annual or monthly number.
Specifically, ensure that payment details in the promissory note are accurate. These details specify when to make payments and (for example, 5th day of each month) and how to make them.
Late Fees and Default
Next, the promissory note can specify any fees to pay if the monthly payments are late. Importantly, in the unfortunate event that payments cannot be met consistently, the loan will be in default. Specify in this area under what conditions the loan will be in default.
Essentially, you can attain certain loans on the basis of collateral. These are called secured loans. Typically, the collateral is an asset that has monetary value. Basically, the assets can be hard assets (cars, houses, etc.) or those assets can be less tangible. This includes assets like invoices and accounts receivables. In essence, this collateral allows the lender to monetize the assets in the event of default.
When should you use a Promissory Note?
In reality, a promissory note protects the lender in the off chance that a borrower is not able to repay the obligation. Also, as a borrower, this document provides a framework for the details of the loan and how the payments should be made.
Should I have a secured or unsecured loan?
Usually, the lender will specify whether or not the loan will be secured by collateral or be unsecured. Likely, this will be via a personal guarantee. Essentially, the lender needs to make the decision on the basis of the background of the borrower and the risk tolerance of the lender.
To sum up, a promissory note protects both parties. Essentially, it provides mutual understanding of how the loan will be repaid over time. For the lender, especially, use this template to mitigate any risk with the borrower involved.
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