Promissory Note – What is a Promissory Note?
Promissory Note - What is a Promissory Note?
At its simplest, a promissory note is just a written promise for one person to repay a loan or a debt to another person, usually within a specific time frame, or by making a scheduled set of payments, or less commonly on demand. A promissory note has a few necessary parts- the names of those involved, the amount which is owed, a detail of what the debtor received in order for the note to be drafted, and the terms under which the debt is to be repaid. Some promissory notes include an acceleration clause, that provides for full repayment of the debt if the person who owes the money misses a payment. When you’re making a promissory note, be sure to keep in mind your state’s laws on usury (the maximum amount of interest you can charge). If you exceed those limits, there can be serious criminal and civil consequences.
A promissory note is an unsecured obligation. If the borrower has to declare bankruptcy, their secured creditors will be repaid before the promissory debt is. If a loan is large enough, it should be secured by a lien, a mortgage, or by putting land or other property up as collateral. If you are lending with an unsecured promissory note, you should not lend more than you can afford to lose. If you need to lend a bit more money, you should consult a lawyer to craft an ironclad promissory note.
Remember, that there are laws against usury. Usury is the charging of an exorbitant interest rate. Depending on where you live, there are differing consequences to entering into a usurious contract. For instance, in some places any interest paid on a loan deemed to be “usurious” will be applied to the principal on the loan. Most locales make usury a criminal offense, however. Just because banks and credit companies are allowed to charge a higher rate, doesn’t mean that an individual can do the same thing. Most places have different sets of rules for institutions and individuals. Before you sign or create a promissory note, consult your local laws.