eople often need to borrow money to finance properties like a house and the lot where it stands. The same thing applies to businesses that need money to finance business investment activities. When an entity (individual or a business) borrows money from another entity and promises to pay the debt, an agreement is entered into through various paperwork, some of which is known as notes.
A promissory note is a written lending agreement between two parties. It serves as a written promise to repay a specified sum of money (principal plus interest) over a specific length of time. The note includes important information like the dates involved (when the money was borrowed, when it should be repaid, maturity date, etc.), interest rate, and specific terms of repayment.
When a lender and a borrower enter into a loan agreement, a promissory note is created and the lender then becomes the note holder. As the note holder, the lender can hold on to the note until the debtor pays off the debt, or the lender can sell it. Selling could come about because they are in need of immediate cash to invest in something else or they feel too burdened with the responsibility of owning a note (which should not happen). This is when another investor takes their place. The note is sold to another investor who becomes the new note holder.
Promissory notes can be “secured” or “unsecured.” An unsecured promissory note is just a promise from the borrower to repay the lender for the loan with no collateral for repayment. That means the note is not attached to anything and is made based on the borrower’s ability to repay. On the other hand, secured promissory notes are attached to properties such as a house so that if the borrower “defaults” (fails to fulfill the repayment obligation) on the loan, it will result in losing the property that is attached to the note. Most promissory notes attached to properties are secured by either a deed of trust, a land contract, or a mortgage.
There are many different types of promissory notes; they depend on the type of loan. Different kinds of promissory notes include:
In most cases, personal promissory notes involve only a verbal agreement between relatives or friends when money is borrowed. There is no legal weight, but it’s a good demonstration of good faith in the borrower and their ability to repay the loan.
A promissory note is a requirement when dealing with commercial lenders like banks. Most commercial promissory notes are similar to, but stricter than, personal notes. The lender can demand immediate full payment after the loan’s maturity date. Default can result in a lien on the borrower’s property in order to obtain payments.
• Real Estate
This is similar to commercial notes when it comes to the consequences of defaulting. On a real estate note, a lien is placed on the property in the event of default, the information becomes public record, and it may affect the borrower’s credit or purchasing abilities in the future.