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Promissory Notes

Promissory notes are needed to document details about financial transactions. They are used to provide lenders with legal records that can be used as evidence in court if borrowers default on loan terms.

Promissory notes are used with most kinds of loans, including personal, business, auto, and real estate. They can be used by family members, friends, business partners, mortgage lenders, auto financing companies, credit card companies, or any other person or entity that extends credit.

People can create their own document by making use of preformatted promissory note templates or using online services such as those offered at LegalZoom. Of course, it's always a good idea to have a lawyer review forms to make certain they are legally binding in the event of loan default.

Anyone signing a promissory note ought to take time to read every word before signing on the dotted line. Nearly everyone prefers to skip over the fine print, but it's important to know what you're signing. Otherwise, you could be blindsided and encounter serious legal and financial consequences.

If you plan to write your own promissory note you'll need to learn the terminology. Five of the most important include: Promisor, Promisee, Obligor, Obiligee, and Mutual Consideration.

The Promisor is the person taking out the loan and responsible for repayment, while the Promisee is the person or entity supplying the loan.

Obligor is the individual legally responsible for payments; usually the Promisor. Obligee is the individual or entity that the Obligor is legally bound to; usually the Promisee.

Mutual consideration refers to the value that the parties involved with the contract receive. For instance, when banks lend money for people to buy houses they receive interest for the duration of the mortgage note. Promisors' receive the money they need to buy a house. Therefore, the mutual consideration would be the real estate, as both parties receive value by participating in the transaction.

It's always best to hire a real estate lawyer to draft real estate notes and land contracts. Realty notes are usually secured by negotiable promissory notes and must comply with covenants of the Uniform Commercial Code.

Promissory notes can also be used to obtain startup funds or capital for business. Investment promissory notes are executed between investors and business owners to guarantee repayment of funds within a designated timeframe. In some instances, investors sell these notes to other investors to free-up cash flow so they can purchase other investment products.

Perhaps one of the most frequently used notes is the Simple promissory note. This promise to pay is typically used when borrowed funds will be paid back in a short amount of time. Simple notes are usually sufficient when entering into small loans with family or friends.

Essentially, simple promissory notes can be compared to an IOU note that provides additional details. The document should include the amount of borrowed funds; interest rates; installment amounts; payment due dates; maturation date; and an acceleration clause that details the consequences if loan default occurs.

Acceleration clauses usually hold Promisor's financially responsible for any expenses related to attempting to collect against defaulted loans. Again, be certain to read the fine print and understand terms of service or hire a lawyer to review the contract for you.

As a real estate investor and business owner, I've made use of promissory notes on many occasions. I've been the Promisor and the Promisee, as well as buying notes from other investors. As long as you take time to understand the basics and read the fine print there is no need for fear.

I've put together a collection of articles on topics people find confusing. I'm not a lawyer and don't offer legal advice, but I think you'll find the information provided in our promissory notes article library a good place to get started.

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Published on January 06, 2012 at 03:13 AM

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