Promissory note is a form of contract that gives the terms and conditions of repayment of a loan. It is also a promise of repayment by one person to another a sum of money. A promissory note should give the details of the principal amount, the interest and the duration for repayment. It should also include details of what the payee is entitled to if the payer defaults on the repayment.
Whether you take a bank loan or borrow from a friend, it is a good idea to sign a promissory note. It will help you immensely to avoid any misunderstanding or when the IRS comes for a business audit.
When you borrow from a bank, they will provide their own promissory note forms. So you do not have to worry. However, if you are borrowing from a friend or relative, you would need to use one that you can get from form books or from a software.
Whenever you sign a promissory note, ensure you pick a repayment plan that you can afford.
While a promissory helps to ensure that the debt is secure, special care should be taken with promissory notes that associated with real estate. This is because promissory loans for real estate are always large and the promisee (the person to whom the promise is made) can not be assured that the promissory note will cover the debt incase the promisor (the person who makes the promise to repay the loan) defaults in payments.
In case of loans related to real estate, the promisee should file for a mortgage or lien in order to ensure that the loan is secure. The mortgage or lien is recorded as a public document so that the next purchaser of property will be informed of the obligation for repayment. If the mortgage or lien is not settled when the property is being transferred to the new purchaser, then the purchaser will get the property subject to the lien. This way you will get adequate security should the borrower go bankrupt or the property is sold.
No matter what method of repayment you chose, do make sure you read the promissory note carefully. Promissory notes given by commercial lenders has all sorts of terms and conditions. Certain states in the US allow the lender to charge you a fee when you repay your loan amount. This is lieu of the lost interest. Check whether your state has that or not and whether the promisee (in this case the lender) has included it in the terms and condition or not.
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