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July 29, 2020 Uncategorized

Types of Promissory Notes

Issuing a promissory note in a transaction can be an effective and simple way to recognize an agreement without the need for an overly complex contract. There are multiple conditions that a promissory note must meet in order to be legally enforceable, but once those conditions are met with the help of an experienced attorney, you can have the peace of mind knowing that your contract with another person or entity is secure. If you would like to learn more about the various types of promissory notes and how our office can help, call or contact Snellings Law today to schedule a consultation.

What is a Promissory Note?

A promissory note is a financial instrument that contains a written promise by one party to pay another party on a future date or on demand. This instrument allows people and companies to obtain loans from other parties outside of a traditional bank. Typically, a promissory note contains all of the relevant information regarding the transaction, including the principal amount, interest rate, date of maturity, time and date of issuance, and signatures by the parties involved. A promissory note may or may not be secured with collateral, or it can simply be the promise of repayment.

This financial instrument falls between an informal IOU and a formalized bank loan because it does more than acknowledge that a loan exists but legally is not as comprehensive as a bank loan contract. However, there is still legal recourse available if a party fails to repay their promissory note obligations. When crafted by an attorney, a promissory note is a legally binding contract like any other and therefore enforceable under the law.

Common Types of Promissory Notes

There are many different types of promissory notes that can detail a promise to repay goods or money between parties and can be very useful financial tools for certain types of transactions. When drafted by a qualified attorney, a promissory note can be a quick, cheap, and effective method to protect your interests in an agreement. Some of the most common types include the following:

  • Simple Promissory Note: This type of promissory note can be for any basic transaction involving the repayment of goods or money from one party to another. There does not need to be a specific purpose for a simple promissory note.
  • Student Loan Promissory Note:A student loan promissory note is a financial instrument that binds a borrower to a loan that must be used specifically for educational purposes. This type of promissory note is also sometimes known as a master promissory note if the lender is a governmental entity.
  • Real Estate Promissory Note: This type of promissory note uses real estate as collateral for the loan. If the borrower fails to repay the lender according to the terms of the note, the lender can place a lien on the real estate. This in turn becomes public record and can impact the borrower’s credit score.
  • Personal Loan Promissory Note: A personal loan promissory note is what is typically used between family members and friends if the parties want to formalize the agreement beyond a basic IOU. A personal loan promissory note does not have to be a loan for any particular purpose.
  • Car Promissory Note: A car promissory note, sometimes called a vehicle promissory note, dictates the terms for a borrower to make payments to the lender in exchange for a car. For this type of promissory note, the terms should include the make, model, and year of the vehicle in question.
  • Commercial Promissory Note: A commercial promissory note is the type of instrument used when the lender is a bank or other commercial entity like a loan agency. The terms of a commercial promissory note are often more stringent than other types of notes, with the option to call in the full loan, plus interest, if payments are not made on time.
  • Investment Promissory Note: This type of promissory note is used to raise capital for businesses and is often used as a substitute to a traditional business loan with a bank. An investment promissory note reduces risk for the investor because they know that they will receive a return in the form of repayment from the borrower, with the collateral sometimes being the ownership stake in the company.

Talk to Our Office Now

Would you like to speak with an experienced New Jersey attorney about your legal options involving promissory notes? If so, call the office or contact us today at Snellings Law in Parsippany to schedule a consultation of your case with one of our highly qualified lawyers now.