Overview of a Promissory Note

A promissory note is a loan Agreement. This is a contract between a borrower, who is looking for money and a lender, who is willing to provide the capital to the borrower. 

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.

Loan Term

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.  

Interest Rate

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.  

Payment Details

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.

Collateral Requirements

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.

Conclusion

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.

You Might Also Like

Along with this document, make sure you see these other templates in our library:

The Zegal Template Library

Zegal's template library represents a complete and curated list of essential and premium business templates that can be used directly, for everyday business needs. Importantly, whether you're a startup or a larger enterprise, you will find that our Zegal automation solution allows anyone to create a legal agreement, any time, anywhere. All without a need for an expensive lawyer. Why do we do this? Well, we think that running your business day-to-day is important, and having these templates at your fingertips allows you to not miss a beat!

Lawyers draft and curate all of our legal templates for ease of understanding using plain English. Just fill out our guided questionnaires, and we will create the contract for you. Using our patent-pending expert rules engine, we automate the creation of complex legal contracts.

Try it for free today!

Ready to get started?


Create a free account now and explore all of the Zegal features.

Get Started

No credit card required