Monday, January 9, 2012

Essentials of a Promissory Note

A promissory note is a "promise to pay" a certain amount of money borrowed. It is usually signed between a "payer" and "payee". Lenders, who are unsure of lending money to the borrowers, often attach a security as collateral.

These include auto, house or any other valuable thing which can be used in case the borrower fails to pay back the loan. Such loans are called secured loans which are often based upon the borrower's ability to repay. Many lenders also issue loans without any security i.e. collateral against loans. These loans are not safe, while the lenders can end up not being paid back at all.

A promissory note is a legal binding which specifies the details of a monetary transaction. The note must provide particular details related to the amount of the loan which is referred to as the "principal amount". It must also include the repayment schedule of the loan, applicable rates of interest, penalties for defaulting and any grace periods.

Any of the parties can bring up a promissory note. However, it is in the best interest of the lender to do it. It ensures that all the mandatory items and provisions have been included. Once both the parties i.e. the payer and payee sign the document, the terms of the contract will be applied in the future in case of any legal proceedings. A best example is when as person buys a car and is short of cash. To settle on this, the person secures the car with a lender. The lender will put forth any repayment specifications before any exchanging money. The document will be called a promissory note which is legally binding. And it is not the same as an "IOU" as many people think of. An IOU is not always taken as a legal document even if it approved through a notary seal. It acknowledges the existence of a debt; it does not include any specifications related to the note as opposed to a promissory note. IOUs are not taken as valid and important as a promissory note because they do not contain sufficient details about the financial transaction.

A properly signed promissory note is important for any legal proceedings; however, if a borrower proves extreme duress during from the lender, the note may be judged as unenforceable. To make it legally binding, a borrower should always read and then sign the completed document.

A promissory note should not be inclusive of condition that would make it an illegal document elsewhere, for example, additional penalties and high rates of interest not mentioned in writing. There can be some other specifications in this case as well; you should ask your legal advisor upon this.

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