Understanding Promissory Note
A promissory note is a legal document in a loan transaction involving three parties: the maker, lender, and borrower. It outlines the loan details such as the sum, interest rate, due date, and party identities. It is primarily used by financial institutions but can also be used by anyone willing to lend money.
It may be secured or unsecured. In a secured note, the borrower pledges an asset as collateral, which the lender can claim in case of payment default. In an unsecured note, there's no collateral; the lender must use different collection methods if the borrower defaults.
Components of a Promissory Note
A promissory note includes all pertinent loan information such as:
- Borrower and lender's names
- Borrower and lender's addresses
- Interest rate and type
- Loan amount
- Repayment terms
- Overdue amount interest rate
- Prepayment procedure
- Maturity date