A secured promissory note and how it is different from an unsecured promissory note. If you are considering giving a loan or you need one, a Secured Promissory Note will provide you with security for that form of a loan. The promissory note offers a lot of collateral because the borrower promises to give up the personal property if the loan is not repaid. However, there are two types of promissory notes, a secured note, and an unsecured note. The primary difference between the two notes is that the terms of a secured note provide the payee with assurance against the risk of default, but an unsecured promissory note does not.
What is a secured promissory note?
A promissory note refers to a written agreement to pay a specific amount of money by a set time to the lender named in the promissory note. All borrowers on the promissory note should sign it, but it’s optional for the lender of the money to sign it. In general, it’s an enforceable agreement that’s usually used between individuals who know each other and it’s fully customizable. Collateral is the property pledged by the borrower to secure the repayment of the loan.
You assign a promissory note to the institution or person who requires it for collateral to secure the loan for you. That is done by filling out official assignment paperwork given by the lender or with an addendum transferring your rights over to the lender. In general, a lender can only accept your promissory note as security if at least a part of the promissory note has already been satisfied. That means that there should have been some, cash paid back according to the provisions of the promissory note.
|Unsecured Promissory Note||Secured Promissory Notes|
|Unsecured promissory notes are not backed by any collateral.||A secured promissory note might include terms that secure the contract by a deed of trust, or a mortgage, or a financing statement that serves as a security agreement for collateral.|
|As a result, the maker doesn’t grant the note holder an interest in the property to assure the payee against the risk of default risk.||When it comes to the secured promissory notes, the maker gives the payee an interest in certain property to secure the loan or offer the payee assurance against the risk of default.|
|Instead, if the recipient fails to adhere to the terms of the note, the holder can consider recourse via a debt collection process like issuing a demand letter, filing a claim in a claims court, or signing a debt settlement contract.||If the maker does not repay the loan according to the terms of the note, the payee can then take possession of the properties that secured the promissory note as a way to recover the unpaid principal amount, fees, interest, and expenses of the note.|
How to Write a Secured Promissory Note?
Following are the elements to be included in the secured promissory note:
Write the date
Start by writing the date of drafting the note at the top of your page.
Indicate the amount of the promissory note
Write the principal amount of the promissory note. Also, add the loaned amount and write it both in numeric value and in words, just like you would write a regular check.
Describe the terms of the note
You should write a description showing how the borrower will repay the loaned amount, such as quarterly, monthly, or weekly payments. Indicate the date when the initial payment will be due by noting down the day, month, and year. Indicate the months and the days that the following loan payments will be due as well. Lastly, indicate the last month and day of the last payment on the promissory note.
Indicate the interest rates
Write down the interest rates of the loan in words and numeric values using a percent sign. Indicate if the rate of interest is a variable or fixed rate.
Decide whether the note is secured or unsecured
Indicate if the promissory note is unsecured or secured. If the borrower is utilizing collateral to offer loan security, note this on the note. For instance, if the loaned amount is secured by commercial property or home, state that in the promissory note by writing down the address of the property and the description of the building.
Include the personal details of the borrower and lender
Include the complete names of both the borrower and the lender on the promissory note, indicating which individual is which. Also, write the mailing address where every payment should be mailed.
Append the signatures
Every borrower must print and also sign his name to acknowledge the responsibility to repay the loaned amount.
Free Secured Promissory Note Templates
Here are free editable templates for you:
Frequently Asked Questions
Is a promissory note legally binding?
When the parties of a promissory note agree and sign the note, it automatically becomes a legally binding document that obligates the two parties to execute according to the agreement.
Does a promissory note hold up in court?
A promissory note can hold up in court if the terms of and repayment and borrowing are properly indicated and signed by the loan borrower.
Which law governs the notes?
In general, the law of the state is responsible for governing promissory notes. However, the common limitations cover secured loans and interest rates. That means you should specify the state’s law which regulates the promissory note if the parties involved are from different states.
What happens on late payments or nonpayment?
A promissory note should outline the fees or interest rates that apply due to late payments. If a borrower fails to pay the amount in full, a lender can file a lawsuit for the remaining balance. The lender can also send the outstanding balance to a reputable debt collection agency. The lender can also decide to utilize a debt settlement contract where a lender changes the duration of time to recover part of the loan or the amount of money owed.
What makes a promissory note valid?
Since a promissory note is generally a form of contract, it will only become valid when a borrower appends their signature to the agreement to show that they are parties to the contract and have agreed to all the terms of the agreement.