What does it mean to purchase a money promissory note? Firstly, a promissory note is a financial instrument containing a written promise by one party, the borrower, to pay a particular amount of money to another party, the payee. This note details indebtedness and includes
information such as the date and place of loan issuance, principal amount, repayment date, interest rate, and issuer’s signature.
With a promissory note, anyone can be a lender. The person or company will provide financing and carry the note under the agreed terms. If you ever borrowed a documented loan from someone or an institution other than the bank, you’ve probably signed a promissory note.
How Does a Promissory Note Work?
According to the Geneva Convention of Uniform Law on Bills of Exchange and Promissory Notes 1930, the debt instrument must have the term “promissory note” in its body and enclose an unconditional promise to pay.
Legally, the enforceability of a promissory note lies between the rigidity of a bank loan contract and the informality of an IOU. Unlike a loan contract that outlines the lender’s right to recourse if the borrower defaults, the note often states the consequences of default but does not provide recourse. Compared to an IOU that only acknowledges the existence of a debt, the promissory note details the indebtedness and includes the promise to pay with the steps of doing so.
When to Use Promissory Notes
Whether you are lending to a business or an individual, a promissory note provides a legal record of the loan, which you can utilize to ensure you are repaid, especially if it’s a large sum. You can use the note when giving student loans, business loans, mortgages, or personal loans. Saleable promissory notes are potential negotiable instruments used in different business transactions.
Types of Promissory Notes
Many promissory notes exist depending on the reason for lending, with the level of formality also varying. Below are the most common types of notes:
Pros and Cons of Promissory Notes
- Commercial Promissory Note
- These are formal debt instruments issued by institutions such as credit unions to borrowers when
giving auto, business, or personal loans.
- Investment Promissory Note
- When an institution other than a bank is issuing a mortgage for a real estate home loan, they give
purchase money promissory notes. Typically, the borrower does not qualify for a mortgage from
the bank. The note often indicates that the home is collateral for the loan, and default may cause
the creditor to place a lien on the property.
- Student Loan Promissory Note
- During undergraduate or graduate studies, a student looking for a loan from private lenders or the
federal system signs an agreement to formalize the loan. The note usually stipulates that the
interest only starts to accrue when the student graduates. Instead of signing the note every year
before taking a loan, the student can sign a master promissory note to borrow throughout the
- Personal Promissory Note
- Also referred to as an informal promissory note, it is used when lending to a family member or
friend. Often, it contains fewer repayment terms than the more formal notes like the corporate
credit promissory notes.
A promissory note simplifies acquiring a loan, especially when the entity seeking the loan does not qualify to borrow from a traditional lender like the bank. You don’t have to read and sign lengthy documents as it would be with a loan contract.
However, promissory notes carry a significant risk to the lender. Unlike financial institutions, private lenders lack the scale of resources that helps them spread risk and reduce losses in the event of default. The potential of legal issues arising between the creditor and borrower is significant if the payee does not honor the promise, necessitating notarization.
Find Help to Purchase Money Promissory Note
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