"Promissory Note" How to use them in a realestate transaction.
A promissory note is a legally binding contract used to document details of a loan between two parties. Promissory notes can be used for many types of financial transactions including personal loans, business loans, and real estate transactions.
Before participating in a promissory note agreement it's important to understand the different types of notes, repayment schedules and legal terms. Let's begin with the different types of notes payable.
Types of Promissory Notes
A common use for promissory notes is to document loans between family members or friends. When lending or borrowing money from people whom you are close to; it's best to construct a promissory note. This demonstrates a good faith effort on behalf of the borrower and offers a sense of security to the lender.
Using a promissory note to document loans provided by family or friends can help prevent misunderstandings. It should clearly outline the repayment terms, amount to be repaid, and how much interest is owed. Promissory note forms can be purchased at office supply stores or downloaded for free via the Internet.
Commercial lenders require promissory notes for most business loans. These notes outline the repayment terms and interest rate. If the borrower defaults on their loan, the lender has the right to demand full payment. If unable to collect, lenders can place a lien on the property which will have a negative impact on the borrower's credit report.
Many companies use promissory notes to raise capital for their business. This type of note payable is issued to investors in exchange for a loan. It guarantees investors will receive a return on their investment within a specific amount of time.
Real estate transactions involve the use of negotiable promissory notes. This type of note is governed by Article 3 of the Uniform Commercial Code and must meet certain conditions set forth by the National Conference of Commissioners on Uniform State Laws.
When entering into a promissory note agreement it's important to select a repayment schedule that is practical. Commercial lenders will provide you with repayment schedules best suited to your financial forecast. Basically there are four types of promissory note repayment plans. They include:
Installment Payments with Interest: Also known as amortized payments, this type of repayment schedule allows borrowers to pay the same amount each month for a specified period of time. With installment plans a portion of the payment is applied toward interest and the remainder is applied toward principal.
Balloon Payments: This type of repayment schedule allows borrowers to either pay installment payments or interest-only payments; followed by one large (balloon) payment at the end of the loan.
Interest-only payments are appealing to those seeking low monthly payments. The downside to interest-only payments is that the principal on the loan never decreases. The balloon payment consists of the entire amount of principal and any interest remaining on the loan.
Balloon payment loans allow borrowers to pay lower monthly payments and are particularly helpful for start-up companies. However, they aren't without risk and should be entered into caution.
Lump Sum Payment with (or without) Interest: These types of loans are frequently used when loans come from friends or family. They are best used for short term loans with duration of twelve months or less. With a lump sum repayment plan the borrower repays the entire amount of the loan on a specified date. If interest is included, the amount of both principal and interest should be clearly outlined in the promissory note, along with the repayment date.
Promissory notes are relatively simple documents, with the exception of negotiable notes. Negotiable promissory notes should be reviewed with legal counsel. Basically, there are only five legal terms used within a basic promissory note.
Promisor - Refers to the person who is obtaining the loan and who will be obligated to repay it.
Promisee - Refers to the person who is providing the loan and who will receive payment for it.
Obligor - Refers to the person who is bound by the legal agreement; usually the Promisor.
Obligee - Refers to the person to whom the Obligee is bound; usually the Promisee.
Mutual Consideration - Whenever there is a contract between two parties there must be some value received by both parties. This is referred to as "mutual consideration". In the case of a promissory note the Promisor receives value from the loan and the Promisee receives value from the repayment of the loan.
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To obtain a free consultation with one of our qualified note buying specialists, provide the information requested at our Promissory Note form. Upon receipt of your information, you will be contacted by one of our consultants within 48 hours. Your information is held in the strictest confidence and will never be shared with anyone. We look forward to serving you!
Published on March 21, 2008 at 07:00 AM | Comments: 1