A promissory note is a written document stating your and your promisor's terms. It is usually used in anticipation or as part of a loan agreement.
The promisor is the person who is promising to pay a stated sum of money. The promissory note becomes the evidence of their debt, and it may be used to enforce the agreement and collect payments.
Let's look at the instances when you need to get a promissory note.
As a Loan or Loan Guarantee
When applying for a loan from an individual, business, or financial institution, you usually have to present a written promissory note. This sets the legal framework that outlines the debt that has to be paid back.
It usually used as part of a loan agreement, which is a contract outlining the loan terms, including repayment dates, interest rates, and penalties. The loans may be personal, business, or student loans.
Before signing a promissory note, you should ensure that the terms are clear and that you understand each one. It is important to know exactly how much money you borrow and your obligations.
A promissory note allows both parties to be aware of these obligations before entering into a final agreement.
Venture / Business Financing
A promissory note is also often used by businesses to raise external capital.
The company may have set up a bank account and a line of credit, but they need to raise money to buy inventory or pay the vendors.
The company drafts a promissory note with an investor or lender to do this. This agreement states that the company will pay back the loan plus interest at a certain rate if they decide not to repay it early.
The lender requires that the business sign its promissory note and provide all necessary proof of payment before releasing the funds.
Government and financial institutions may insist on seeing a promissory note the same way businesses do. This shows that you are legally liable to repay the funds at the agreed interest rate.
A promissory note should contain all pertinent information about your debt, including what you owe, how much, and when you need to make payment.
When You Need to Enforce Payment
If you have a promissory note and the promisor fails to pay, you may need this document in court.
A promissory note is a kind of contract, which means that it has legal standing and can be used as proof of your dispute if necessary. It is important to remember that you must have a standing dispute before taking legal action.
For example, if you have a dispute with the business that owes you money and that business refuses to pay their debt, taking them to court is your legal right. The court will look at your promissory note and other evidence (e.g. loan agreement) to determine the outcome of your case.
Generally, you can use a promissory note to enforce payment for comparably small sums.
The more money at stake, the more complicated it is to enforce your rights in court with a promissory note. Before using your promissory note as evidence in court, you need to consult with an attorney and make sure all concerns have been resolved.
When Getting a Mortgage
When applying for a mortgage, both the bank and the homeowner need a way to ensure that they are protected in case of a dispute. The bank will require that you provide them with a promissory note before approving your loan. A promissory note is often included in loan documents, mortgage deeds, and title documents.
In addition to providing proof of payment and protection from the bank, a promissory note can prove who is responsible for property maintenance and repairs. The promisor is responsible for maintaining the property and ensuring all repairs are done correctly. This may include paying for any necessary repairs and renovations and paying homeowners' association dues.
A reliable loan officer should be able to answer all of your questions about promissory notes and drafts, so ask before signing or get a second opinion if you have any reservations. Keep in mind that it is possible to obtain a promissory note without paying the borrower at the time.
Having too much debt and borrowing money may not be the best way to handle your finances, but it is sometimes a necessary course of action. Before signing a promissory note, always remember to read the fine print and do your research.
Always have a plan on how to pay the loan obtained, and do not borrow money if you may have trouble repaying it. A promissory note is a legal document you must abide by that cannot be easily broken or altered.