Definition and Example of a Promissory NoteA promissory document identifies the terms of a loan agreement, the lender, and the borrower. It cites how much money is being borrowed and the frequency and amount of required payments. A promissory note should also indicate the interest rate being charged and the collateral, if any. It should include the date and place where the note was issued. It should also include the signature of the borrower. Show
How a Promissory Note WorksA promissory note can be either secured or unsecured. An unsecured promissory note pertains to a loan that's made based solely on the maker's ability to repay. A secured promissory note means the loan is secured by an item of value, such as a house. NotePromissory notes are enforceable legal documents. A borrower can be sued if they default on the agreement and the loan's terms. Types of Promissory NotesThere are several types of promissory notes. The differences hinge on the type of loan involved and the information the note contains:
Promissory notes can also vary depending on how the loan is to be repaid:
Promissory Notes vs. MortgagesA loan and a promissory note are similar, but a loan is much more detailed. It describes what will happen if the borrower defaults on payments. The lender holds the promissory note while the loan is being repaid. Then the note is marked as paid. It's returned to the borrower when the loan is satisfied. NotePromissory notes aren't the same as mortgages, but the two often go hand in hand when someone is buying a home. The promissory note records a promise to pay. The mortgage, also known as a "trust deed" or "deed of trust," records what happens if the borrower defaults. The lender would probably have the recourse of foreclosure. The mortgage secures the promissory note with the title to the house. It's also recorded in the public records. Promissory notes are generally unrecorded.
Requirements for Promissory NotesEvery state has its own laws regarding the essential elements of a promissory note, but they often include similar elements:
Many promissory notes don't include a prepayment penalty, but some lenders want to be assured of a certain rate of return. This could be reduced or eliminated if the payor pays off the promissory note before its maturity date, so a prepayment penalty might be included. A common penalty might equal the sum of six months' unearned interest. Promissory notes are binding documents, so there are consequences for not following their terms. You could lose your home to foreclosure if you fail to repay a loan that's secured by the property. The lender would have the right to take you to court, to send the debt to a debt collection agency, or to report to the credit agencies. Can I Write My Own Note?Writing a binding, enforceable promissory note can help avoid disagreements, confusion, and even tax troubles when you're borrowing from an individual. It can be a simple contract between the borrower and the lender. Think about hiring a lawyer to create one for you if you want to be absolutely sure that all parts of your promissory note are correct. TipHaving a professional draw up your promissory agreement is especially worthwhile if a large amount of money is involved. State usury laws could affect a promissory note. They set a maximum rate of interest that can be charged. Lenders must charge an interest rate that reflects fair market value. Be sure you're familiar with your state's laws if you're going to write your own note. The IRS takes an interest in loans as well, so it can be helpful to understand tax law. Interest earned by a lender is considered to be taxable income. The IRS can impose its own rate of interest on below-market loans. It can force the lender to pay taxes on that amount when no interest is being charged. A borrower could be taxed on the forgiven amount as income if the lender forgives the loan and waives repayment. A qualified tax professional can help if these tax implications seem too complicated to handle on your own. Key Takeaways
WHO IS maker and payee in promissory note?1) The maker: This is basically the person who makes or executes a promissory note and pays the amount therein. 2) The payee: The person to whom a note is payable is the payee. 3) The holder: A holder is basically the person who holds the notes.
What is promise in a promissory note?A promissory note is a financial instrument that contains a written promise by one party (the note's issuer or maker) to pay another party (the note's payee) a definite sum of money, either on demand or at a specified future date.
Who gives promissory note?A promissory note is a legal, financial tool declared by a party, promising another party to pay the debt on a particular day. It is a written agreement signed by drawer with a promise to pay the money on a specific date or whenever demanded.
Who is the bearer of a promissory note?Bearer: the person who holds a promissory note. He is also called the holder. The bearer and the payee is usually the same person, but they can be different. Endorser: the person who endorses a promissory note.
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