A promissory note is a document that details
money borrowed from a lender and the repayment structure.
There are two types of promissory notes, secured and unsecured.
Secured promissory note A secured note is an agreement for borrowed
money with the condition that if it is not paid back to the
lender then the security, which is usually an asset or property, is
turned over to the lender. Unsecured promissory note
An unsecured note does not allow the lender to secure an asset for
money loaned. This means that if the payment is not made by the
borrower that lender would have to either file in small court or other
legal processes. Why use a promissory note?
A promissory note confers many benefits, including: Certainty of payment
Marketability Judicial certainty Certainty of payment
Under the Uniform Commercial Code (UCC), which sets out the
requirements for negotiability, the borrower’s obligation to pay must
be unconditional and due at definite time. Therefore, there is less
likelihood as to the amounts owed under the note. Marketability
Certain transferees of negotiable notes have greater rights against
the obligor under the note than the initial holder. Judicial certainty
Because promissory notes do not include many obligations other
than the obligation to pay, the main issue a court needs to decide is
whether the borrower is in default of the obligation to make a
payment. As a result, in the event of a default, it is more likely that a
lender will be granted a summary judgment. What is to be included in a promissory note?
Each promissory note has its own unique set of issues and clauses,
but almost every promissory note will have the following: The terms of the loan
The borrowing and repayment procedures and the
calculation of interest and fees The liabilities and obligations of the
parties It is always a good idea to run a credit report
on any potential borrower as they may have outstanding debt unbeknownst
to you. Especially if the debt is IRS or child support
related it will take precedence over this promissory note. Therefore,
it is imperative that a credit report is run before making
any type of agreement.