Promissary notes are used to record details of financial transactions. These legally binding contracts can be used to record personal loans, transfer real estate, buy or sell a business, and transactions which involve the exchange of property for money or vice versa.
Several types of promissary notes exist. The most common is known as the 'Simple' note. Simple promissory notes are used when the loan is repaid in one lump sum payment. Repayment is made within a short period of time; usually 90 days.
Simple promissary notes work well when loaning money to friends or relatives. In essence, simple notes are an IOU. At minimum, they should document the amount of the loan, interest rate, total repayment amount, maturity date and what occurs if the borrower defaults on their promise to pay; known as the acceleration clause. Typically, the acceleration clause calls for immediate demand of payment in full.
As with all promissory notes, Simple notes should be signed by all parties involved and notarized.
Another common type of promissory note is the 'Installment' note. Installment promissary notes are used when the loan is repaid in installments over a period of time. Payment schedules can be weekly, bi-monthly, monthly, quarterly or annually.
Depending on the amount involved, collateral may be required. Collateral is pledged for repayment of the loan. If the Borrower defaults; the lender assumes ownership of the collateral property.
When acceleration clauses are included in installment promissary notes, they usually include a clause making the Borrower responsible for collection and legal actions in the event of default. As with all contracts, it is important to read the fine print. Otherwise, you could be agreeing to something you cannot adhere to.
Last, but not least, promissory notes should document prepayment policies. Oftentimes, commercial lenders penalize Borrowers for paying their note off early. In some cases, prepayment fees amount to several thousand dollars.
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