Characteristics of a Promissory Note
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A Promissory Note is used to document a loan. It is a legal IOU signed by the borrower that specifies the loan amount and the agreed-upon terms.
A promissory note is used to keep a record of the transaction when money is loaned from one party to another party. It is a written promise by the borrower to pay a specific amount of money to the lender. It is a legal "IOU." Often an interest rate will be set on the unpaid amount of the loan.
What is the difference between the different types of promissory note?
Promissory Note - Payment On Demand is used when the loan will be due and immediately payable in full upon the lender's demand. With this form, there is no specific due date for repayment of the loan.
Promissory Note - Installment Payments is used when the loan is to be repaid in periodic (usually monthly) installments.
Promissory Note - Installment Payments With Balloon Payment is used when the loan is to be repaid in smaller periodic (usually monthly) installments, with one large "balloon" payment at the end of the loan term.
Promissory Note - Lump-sum Payment Without Interest is used when the borrower is to repay the principal in a single payment (also known as a lump-sum payment) on the date the payment is due. With this Note, no interest will be charged to the borrower.
Promissory Note - Lump-sum Payment With Interest is used when the borrower is to repay the principal and interest in full, in a single payment (also known as a lump-sum payment) on the date the payment is due.
Promissory Note - Interest-only Payments is used when the borrower agrees to make interest-only payments on a regular basis during the term of the loan, then repays the entire principal in one payment at the end of the term.
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Information that should be included in a promissory note:
- Interest Rate - floating rate, adjustable rate or fixed rate
- Repayment type.
- Monthly payments (equal amount)
- Interest-only payments on a monthly basis with a final balloon payment
- Monthly payments (equal amount) with a final balloon payment
- Payment on demand
- Payment dates
- Payment methods
- The lender's right to demand full payment if the loan payments become past due
- Attorney's fees clause
- Printed name and signature of borrower
- Penalties for late payments
- The lender's right to assign payments to a third party
- The promissory note must be signed by the borrower and the the lender
