As your promissory note attorney can tell you, when you borrow money for your small business, a promissory note may be used to document the loan’s repayment terms. Repayment can be structured in a variety of ways. To ensure that you choose the option that’s right for your business, familiarize yourself with the most popular repayment schedules.
When Does it Make Sense to Use a Promissory Note Lawyer Phoenix?
Promissory notes make sense in a number of situations. When borrowing start-up capital from a commercial lender, you will be asked to sign one. One should also be used when borrowing from a friend or relative. Promissory notes eliminate confusion regarding the terms of a loan, including whether it’s actually a loan or a gift. They outline when the money is to be repaid and how much interest is owed. If the IRS performs a business audit, a promissory note provides the necessary documentation to avoid problems.
Types of Promissory Note Repayment Schedules
Banks and commercial lenders provide their own promissory note forms. If you need one for loaning money from a relative or friend, you can get one from the Internet, from software or from a book. Promissory notes’ practical and legal terms tend to vary, but the most crucial aspects of these documents is the repayment schedule. Some of the most popular repayment schedules include:
Amortized Payments – With an amortized repayment schedule, you make equal monthly or yearly payments over a specified number of months or years. Part of each payment is applied to interest, and part is applied to the principal. Upon making the final payment, the loan is repaid in full. This means that the loan is completely amortized over the period during which payments are made. After learning the terms of such a loan, you can calculate the installment payments using an online calculator, special software or a printed amortization schedule.
Equal Monthly Payments and a Final Balloon Payment – With this type of repayment schedule, you make equal monthly payments for interest and principal over a short period of time. Once the final installment payment is made, you pay whatever is still owed with a final, large balloon payment. The plus side of this repayment schedule is that your monthly payments are lower, so you can keep more cash handy. However, the final balloon payment portion poses some pretty serious risks. For instance, if you’re going to buy and quickly sell an asset to afford the final payment, you gamble that the asset won’t depreciate significantly in the meantime.
Interest-Only Payments and a Final Balloon Payment – In this case, you make recurring, interest-only payments over a period of months or years. During this time, the principal doesn’t decrease at all. When those payments are done, you are left with a final balloon payment that covers the principal and any remaining interest. This schedule has the perk of offering lower monthly payments. If you have extra cash, you can prepay the principal to make the final payment less severe. However, you’re going to pay a lot more interest over the life of this type of loan because you are borrowing the full principal amount for a longer period of time. For a $20,000 loan that’s repaid in four years, you will pay around $3,000 less with equal, amortized payments.
Single Payment That Includes Interest and Principal – This type of loan is almost exclusively used between individuals; commercial lenders typically won’t even consider offering one. Instead of making regular payments for principal and interest, you pay off the entire loan at a specified date in the future. The payment includes the entire principal as well as the accrued interest. This repayment schedule makes the most sense for short-term loans or for when the lender isn’t worried about being repaid on time. This option shouldn’t even be on the table for a long-term loan, as the one and only payment is likely to be enormous due to the accrued interest.
Read Promissory Notes with Care
Promissory notes from commercial lenders are generally written in legalese that is difficult for laypeople to make sense of. Some include waivers of legal rights that can be highly problematic. For example, some impose early repayment penalties, as some states allow lenders to do so to make up for the loss of future interest income.
Hire an Experienced Promissory Note Lawyer Today
Whether you’re taking out a loan with a commercial lender or private individual, ensure that your rights are protected. Speak to a promissory note lawyer at Snellings Law LLC today by calling (973) 265-6100.