What are Promissory Notes?
The promissory note or promissory letter is a binding legal instrument that acts as a borrower’s promise to repay a private loan to a lender. Many individuals have the perception that a promissory note is nothing more than a complex version of an IOU, but the fact is that legal promissory notes act much in the same manner as official bank loan documents. The main difference between a promissory note form and a bank loan is that promissory notes allow anyone to become a lender of money or property and the only limiting factor is the lender’s own discretion on who to lend to and what the terms of the repayment will be. Promissory notes and promissory letters have become increasingly popular, as a vehicle for non-traditional lending that does not require borrowers to have excellent credit. You can use it for obligations ranging from inter-family loans to mortgages. Student loans, bank loans, commercial loans and vehicle loans are other common uses. Says Neil Kokemuller who writes about the advantages and disadvantages of promissory note on sapling.com also has a similar definition and says A promissory note is a relatively informal, but still legally binding, loan commitment. Simplicity and flexibility are two primary advantages of using a promissory note in lieu of a loan. However, promissory notes aren’t as beneficial in complex situations where a more formal loan agreement is necessary. An advantage is the simplicity and straightforward nature of a promissory note make it most beneficial when a loan has simple payment terms. You don’t need to record nearly as much detail or have as lengthy of a document with a promissory note. are the loan amount, interest rate and repayment schedule, according to Equifax. It’s helpful to add a few additional details, such as the property address and phone numbers of the parties involved. With basic inter-family loans and other small-value notes, you don’t need a thorough legal review of the document. Instead, have a CPA, financial professional or Notary “witness” the signing of the note. Disadvantages would be Since the primary value of a promissory note is simplifying the loan process, it isn’t as beneficial for more complex situations. A loan agreement is necessary when you have a more complicated loan or you want greater protection against borrower default. Another risk to novice borrowers is that savvy lenders may hide unfavorable terms in the fine print of a longer promissory note. Before signing any type of legally-binding loan document, both parties need to thoroughly read and understand all critical terms of the document. With a real estate note, one tactic used by lenders is tucking early payment penalty details into obscure sections of the note. This penalty means the borrower may have to pay a lump sum penalty when trying to pay off the loan before the mortgage term is completed. Time-consuming legal reviews sometimes are necessary with more detailed notes. So as you can see there are different and a variety of ways, and vital to know all the outcomes on the contract that attorneys will make.