The borrower may be referred to as the maker, obligor, payor, or the promisor. The borrowed money is called the principal. The lender may be called the payee, oblige, or promise. The note usually includes a specified amount of interest on the unpaid principal amount. The specified time of payment may be:
- Whenever there is a demand
- On a specific date
- Installments with or without the interest included in each installment
- Installments with a final larger amount (balloon payment)
A promissory note may contain other terms such as the right of the lender to order payment be made to another person, penalties for late payments, a provision for attorney’s fees and costs if there is a legal action to collect, the right to collect payment in full if the note is secured by real property and the property is sold (“due on sale” clause), and whether the note is secured by a mortgage or deed of trust or a financing statement (a filed security agreement for personal collateral).
The promissory note is usually held by the party to whom the money is owed. When the amount due on the note including interest and penalties is paid, the note must be cancelled and surrendered to the person who signed it. A promissory note need only be signed by the borrower, and does not require an acknowledgement before a notary public to be valid.
When to Use a Promissory Note
- Use a promissory note if you want to formalize the agreement to let a person loan or borrow money from you
- If you want to loan money to a business or private party and you want all the terms in writing
- If you wish to prepare an amortization table of the loan that includes interest
- If you want to see and determine the amount of monthly payment for the loan
- If you are assigned to outline the terms of loan of a lender and a borrower
- Make sure to print, sign and save the document after completing
Basics of a Promissory Note
A loan should have a written contract as to avoid misunderstandings about the terms of payments later. Every loan is unique, so it is a great idea to put everything into writing. Writing a promissory note should be tailored to your specifications of that particular loan.
Payment Options for your Promissory Note:
Structuring payment can have several options:
- Lump Sum. This means that the borrower will return the money borrowed in a full, single payment. A date due will be indicated on the promissory note or it can be noted as “due on demand”. This is the most straightforward type of repayment.
- Due on Demand. The lender can demand anytime that the borrower repay him or her. The borrower is given time before a demand is made, and if agreed by both parties, the borrower can make initial payments before the demand.
- With Interest. A monthly interest rate can be included on the promissory note. The payment will be applied on the interest due first and the principal after. If payment is not made, the lender can have the option to increase the interest rate moving forward.
Collecting on your Promissory Note
Having a promissory note is not a guarantee that the borrower will readily pay you back in a timely manner. If you have difficulties in being paid by the borrower, consider the following:
- Be polite. Sometimes life gets in the way and loan payments are not on time. Some unforeseen circumstances may have befallen the borrower. Generally, borrowers do not want to feel beholden and they are motivated to repay their loans. Asking nicely for repayment and being understanding about unforeseen circumstances may make the borrower more inclined to pay in full. Being polite can pay off in the end
- Ask for payment in writing. If being nice does not yield results, consider the more direct approach of sending a past due notice. This will get their attention and show the borrower that you are serious about collections. As the lender, make sure you have the copies of these notices as they can be useful if your loan ends up in court
- Use a Debt Settlement Agreement. This is done to restructure the payment scheme if the borrower cannot pay the loan. Rather than write off the entire loan as a loss or incur legal fees, the borrower is given the chance to make good on the money borrowed by changing the amount owe or the amount of time the borrower has to pay the lender.
- Call a debt collector. As a last resort, you can call a professional to collect on the payments. Debt collecting agencies will buy your debt at a discount and then use aggressive tactics to collect what they can.
Source: 1-2-Law: https://www.12law.com