Why promissory note is used

Find out when you need a promissory note and how to create one. A promissory note is essentially a written promise to pay someone. This type of document is common in financial services and is something you've likely signed in the past if you've taken out any kind of loan.

If you decide to lend money to someone, you may want to create a promissory note to formalize the loan. Promissory notes may also be referred to as an IOU, a loan agreement, or just a note.

It's a legal lending document that says the borrower promises to repay to the lender a certain amount of money in a certain time frame. This kind of document is legally enforceable and creates a legal obligation to repay the loan. A promissory note is used for mortgages, student loans, car loans, business loans, and personal loans between family and friends.

If you are lending a large amount of money to someone or to a business , then you may want to create a promissory note from a promissory note template. This note will be a legal record of the loan and will protect you and help make sure you are repaid. A loan promissory note sets out all the terms and details of the loan. The collateral referenced above is a property that the lender can seize if the note is not repaid; for example, when you buy a home, the house is the collateral on the mortgage.

Promissory notes should be created to fit the transaction that you are involved in. It's always good to refer to a sample promissory note when you are writing one so that you can be sure to include the right language. There also are different types of promissory notes. A simple promissory note might be for a lump sum repayment on a certain date. The full amount is due on that date, and there is no payment schedule involved. There may or may not be interest charged on the loan amount, depending on what you've agreed.

A demand promissory note is one in which payment is due when the lender asks for the money back. The lender in question will often require borrowers to repay the loan with interest. Student IOU — When taking out a student loan, the terms and conditions stipulated within a student promissory note will often defer interest from accruing on your loans until after you graduate.

Additionally, the start date is often flexible and undetermined until you graduate. Investment IOU — A company can issue a promissory note when raising capital from investors. Investment promissory notes ensure that the investors receive their return on investment over a specified period. After a promissory note is established between parties, there are four main ways for a borrower to repay the loan and interest to their lender.

Lump-sum — This means that the entire value of the loan will be repaid in one payment to the lender. Lump-sum payments are common with small or informal loans where lenders will tell the borrower when the loan is to be paid back, and the borrower will not have to make monthly payments. Installment — This is the most common form of repayment where a specified repayment schedule is established, allowing a borrower to pay back a high-value loan over time. The installments, or payments, are typically made monthly and are equal amounts each month to add up to the total value of the loan.

The payments will often include interest until the total principal is paid off. Due on demand — Also known as open-ended loans, the borrower must repay the loan when the lender asks for repayment. This form of repayment is more common for informal loan agreement and is typically between friends and family. If a promissory note does not have payment terms listed on the document, it will be considered due on demand.

The same can be said for interest to be charged on the debt. A financial institution usually charges interest when loaning money but an individual is at liberty to collect interest or not depending on who they are lending to. Usually, when lending to family members or close friends , it is advisable to charge little to no interest to avoid any bad feelings.

However, an individual is well within their rights to charge reasonable interest if they are inclined to do so. Promissory notes create a legally binding promise with a mutual understanding regarding the borrowing and repayment of money. Promissory notes are invaluable legal tools to bind other individuals to an agreement for goods or money; they carry the full weight of the law and are legally binding on both parties. Use promissory notes in routine and straight-forward contractual relationships between parties to avoid costly legal expertise.

Next time you are entering into an agreement for goods or money, turn that handshake and bar napkin into a legally enforceable promise with a promissory note. IOUs are informal and flexible. However, they carry no legal weight in a court of law. IOUs are the least protective of all notes and agreements, while loan agreements carry the most weight and are legally enforceable.

Loan agreements are used for complicated repayment arrangements offering legal recourse foreclosure for a lender, should a borrower default. Promissory notes are legally binding, however, they fail to provide remedies and recourse for a non-defaulting party. When to Use One? Installment payments are commonly used when you are looking to purchase expensive items.

Such items may include a new refrigerator, stove and other appliances. Pros: When repaying the loan, payments are divided up into equal monthly payments the installments , along with interest.

It is discharged only after the principal balance has been repaid. Installment payments allow for flexibility through gradual repayment of the debt or loan. This allows you to customize and adjust the repayment to your income. Cons: Installment payments are usually subject to high-interest rates, increasing the sum of money you will have to repay. Lenders often disallow prepayment of loan balances, capping the amount you are able to pay back per month.