What is a Promissory Note?
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To us, it’s a legal document that details an agreement about borrowed money between two parties. The one party is called the borrower, and their role is to repay the amount of money listed in the promissory note to the other party, known as the lender. The date on which the financial transaction takes place will also be stated in the promissory note.
Promissory notes are often used for handing out personal loans, solidifying business agreements, and supporting real estate transactions. Within a promissory note, you can find the following terms for repayment:
What is a Master Promissory Note?
It’s a legal document that outlines all the terms and conditions for a party to repay multiple loans. A master promissory note (MPN) is often used for student loans in the United States of America. Here are a few types of federal student loans that use MPNs:
A key feature of an MPN is that a party can borrow and repay multiple loans. These loans can exist for many academic years without the need for the student to sign a new promissory note. For example, a student will sign the MPN once, and the document will cover all loans for the duration of the study, which can be up to 10 years.
Secured Vs. Unsecured Promissory Note
When it comes to secure and unsecured promissory notes, their major difference is COLLATERAL. Let’s take a look at the table below for a better understanding of the differences between secured and unsecured promissory notes.
| Secured Promissory Note | Unsecured Promissory Note | |
|---|---|---|
| Definition | This type of promissory note contains collateral in the form of an asset or property offered by the borrower. The collateral is promised to the lender in the event the borrower is unable to repay the loan. In this situation, the lender can legally take the collateral to make up for the defaulted repayment. | This type of promissory note does not contain collateral. This means that the borrower gives just their word to repay the loan. This type of loan agreement is more risky for money lenders. |
| Feature 1 | Assets offered as collateral include cars, houses, and other valuable items. | There is no collateral offered by the borrower. |
| Feature 2 | Since there is collateral involved in the agreement, the risk for the lender is lower, as they can recover losses by seizing the assets stated as collateral. | The lender has a higher risk of loaning money. If the borrower does not repay the loan, the lender will have to resort to legal action to recover losses. |
| Feature 3 | Interest rates are lower for secured promissory notes as collateral is involved. | Lenders will ask for higher interest rates as the risk of loaning money is greater. |
| Example | An individual can take a loan to pay for their studies at a university. When they do this, they sign a secured promissory note. In the agreement, the student can add their car as collateral. When the time comes, if the student cannot repay the loan, the lender can seize the car to cover the costs of the academic expenses. | An individual can open up a store account to purchase clothes with an unsecured promissory note. In this case, the borrower does not provide collateral, and the lender can take legal action to get the borrower to repay the loan. |
What Does a Promissory Note Look Like?
It looks like a structured document containing legal and financial information. However, a promissory note will also include custom terms and styles relevant to the business that created it. However, here is what a basic promissory note would likely look like:
What Should be Included in a Promissory Note?
As promissory notes serve as agreements of debt a borrower owes and the legal terms to recover losses, it should contain the following key elements:
Who Signs a Promissory Note?
A promissory note is signed by the borrower and lender. Let’s take a look at these signers in more detail.
The borrower is the person who wants a loan and promises to pay it back to the lender. When they sign the promissory note, they acknowledge that they agree to the terms and conditions in the document. For this reason, the borrower should take note of the payment schedule, interest rates, and the total loan amount.
The second person who can sign the promissory note is the lender, but this is not a requirement in all cases. Most times, the borrower’s signature is enough to start the loan agreement. This is because the borrower is the party promising to repay the loan.
If you want more information on ELECTRONICALLY SIGNING documents like promissory notes, make sure to read our Salesforce e-Sign article.
Types of Promissory Notes
We already mentioned master, secure, and unsecured promissory notes. But what other types do we get? Let’s take a closer look at the different types of promissory notes.
Mortgage Promissory Note
In this legal document, the borrower promises to repay the lender when they need money to buy real estate. Mortgage promissory notes are used for home purchases and will include the following information:
Student Loan Promissory Note
This legal document is designed for students who need to borrow money to further their education. Like other agerements, the student loan promissory note will include:
Corporate Credit Promissory Notes
Businesses that want to borrow money from an investor, bank, or other financial institution will use a corporate credit promissory note. This type of legal document is often used by businesses when they need short-term loans, money for working capital, or to support expenses. Within a corporate credit promissory note, one will find:
Generate Promissory Notes in Seconds with TITAN Document Generation
Promissory notes need to be accurate and consistent as they are formal legal documents that follow a particular structure. Creating one from scratch whenever you need it can be a time-consuming task. Even if you had to manually copy data out of a database and paste it into your promissory note, you would need to dedicate time to double-check that your document is free from typical errors like typos, incorrect details, and missing information.
If you want to speed up your promissory note creation process and eradicate errors from your documents, we highly recommend Titan Doc Gen for Salesforce.
With our powerful, no-code app, you can create professional promissory notes with point-and-click tools directly from Salesforce. Working with software can save you hours and weeks from manually creating promissory notes from Salesforce. Here are some of the biggest wins you get from choosing Titan Docs:
These are just a few Titan features to slash your administrative time using no-code automation. For a full feature list, please feel free to contact us.
Where Knowledge and Solutions Meet
Thanks for reading our article about what a promissory note is, along with examples. Here at TITAN, we like to learn about business tasks and find the best automation solutions to optimize them for your teams. Then, you get to spend your valuable time on other high-level tasks, like driving business growth.
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Disclaimer: The comparisons listed in this article are based on information provided by the companies online and online reviews from users. If you found a mistake, please contact us.
Frequently Asked Questions
What makes a promissory note legal?
The elements in a promissory note make it a legal and valid document. Ensure you have these sections in your promissory note to keep it legal:
- The borrower and lender’s personal details and contact information.
- An unconditional promise that the borrower will repay the lender.
- The total amount of the loan.
- Repayment terms.
- The borrower’s signature.
- A description of what is being exchanged between the borrower and the lender.
- The date when the agreement was signed.
- Legal terms so the borrower is aware that the document might be used in court if they cannot repay the loan.
- Include local laws in which the business operates. For example, some jurisdictions require a notary signature on a promissory note for it to be considered a legal document.
Is a promissory note a legal document?
Promissory notes can be legal documents if they contain the correct requirements.
What happens if a promissory note is not paid?
The lender will read the promissory note and check if there has been any collateral added to the agreement. If there is collateral, the lender can legally seize the asset to make up for the defaulted repayment.
If there is no collateral allocated, the lender can take legal action and use the promissory note as evidence of the loan in the court case.
What happens to a promissory note when the lender dies?
It still holds and is considered a valid document. The right to collect debt from the borrower is passed to the lender’s beneficiaries or estate.
Is a promissory note transferable?
Yes.
Is a promissory note a contract?
Yes. You can use contract management software like Titan CLM to create and deliver them from Salesforce.
What is a convertible promissory note?
It’s a document that lets the lender convert debt from a borrower into equity, like shares of stock from the borrower’s company. This strategy can be used if the borrower does not have cash to repay the loan. A convertible promissory note is mainly used by startup companies so they can raise money with flexible solutions in the agreement.
How long is a promissory note valid?
They are usually valid for three years after they come into existence. However, it is important to check the laws and regulations of the country and business industry you operate in to determine the exact time.
Who issues a promissory note?
That would be the lender of the loan.
