What is a Promissory Note?

A promissory note is a written instrument that is commonly used in various loan transactions. It contains the borrower's promise to pay the borrowed fund within payment terms, like the amount borrowed and the specific period of time when the debt or loan is to be repaid. The signature affixed by the borrower on the note makes the contract legal and binding.

Elements of a Promissory Note

A promissory note is comprised of many components. The basic elements you will find on the document are:

  • borrower and lender information (name, address, social security number, etc.)
  • the principal amount borrowed
  • the annual interest rate the loan accrues
  • exact date the loan or debt is promised to be paid off
  • installment terms if the payer and the payee agreed the repayment in successive fixed times
  • related fees like late payment, default, and collection charges

Secured and Unsecured Promissory Notes

A promissory note can be secured or unsecured. With secured promissory notes, the types of lien to secure the loan are mentioned on the contract. It could be the borrower's mortgage, deed of trust, vehicles, and other assets. Meanwhile, an unsecured promissory note is the opposite, which puts lenders more at risk.

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