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May 26, 2021 Collections

What are the Different Types of Promissory Notes?

Promissory notes record the financial details of real estate transactions, business loans, and personal loans. Promissory notes are legally binding contracts, and in the event that a borrower does not repay their loan, the lender can use the promissory note in court to recover the debt. Banks and lending institutions almost always require a promissory note so they can demand full payment of the loan if the borrower defaults.

Promissory notes are sometimes considered to be unsecured, which can make collection of the debt more difficult. Still, lenders can take legal action based on an unfulfilled promissory note, and they can also place liens on certain property. Promissory notes are largely misunderstood by many people. Below are the answers to some common questions about promissory notes, including the different types that are available.

What is a Promissory Note?

Promissory notes are documents attached to a certain loan agreement. The document outlines the term of the loan and, as the name suggests, the terms in which the borrower promises to repay the debt. As outlined in the loan agreement, a promissory note can also outline the interest that is collected on the loan, although lenders must follow state law when determining their rates.

Unlike the actual loan agreement, only the borrower must sign a promissory note. The lender’s signature is not required. Witnesses are also not necessary for the signing, but sometimes a promissory note is notarized.

What are the Different Types of Promissory Notes?

There are many different types of promissory notes, depending on the type of loan and the terms outlined in the agreement. The most common forms of promissory notes are as follows:

  • Secured promissory notes: A secured promissory note is one which has collateral attached to it in the event the borrower does not repay the loan. The classic example is a promissory note attached to a mortgage loan. If the borrower defaults on the loan, they do not fulfill their promise and the lender can repossess the home.
  • Unsecured promissory notes: Unlike secured promissory notes, those that are unsecured do not have any collateral attached to them. Many people think that because no assets are at risk, lenders cannot collect on the loan but that is not true. A lender can still take legal action even when the note is backed by collateral.
  • Personal promissory notes: The most common form of promissory notes, these are used when money, vehicles, jewelry, or other valuables are exchanged between family members or friends. While of a personal nature, these promissory notes are still legally binding, and the lender can even ask for collateral to guarantee the loan.
  • Balloon promissory notes: With a balloon promissory note, the early stage of the loan requires smaller payments, and the borrower must make a larger payment towards the end of the loan.
  • Master promissory notes: A master promissory note bundles several different loan agreements and outlines the payments required over an extended period of time.
  • Demand promissory notes: These types of promissory notes are not as common. A demand note does not include a fixed amount of time borrowers have to repay the loan but instead, is used when the lender is demanding the loan be paid in full.

Promissory notes are a standard way to do business, and there are real consequences for not fulfilling one.

What Happens if I Default on a Promissory Note?

You can face serious legal action if you default on a promissory note. If you refuse to fulfill the terms outlined in the note, the lender could file a lawsuit against you and take you to court to recover the debt. In some cases, a lender may also place a lien on your property, which could put your home or business at risk. Lastly, your credit score will also drop dramatically, which could impact you for years to come. It is for this reason that if you have defaulted on a promissory note, you should speak to a collections lawyer that can help you prepare a defense.

Call Our New Jersey Collection Lawyers Today

Facing legal action due to a defaulted loan or promissory note can seem overwhelming, but you do not have to face it alone. At Snellings Law, our collection lawyers in Parsippany-Troy Hills know the defenses available to you, such as if the lender violated your rights in the loan agreement or the subsequent lawsuit. Call us today at (973) 265-6100 or contact us online to schedule a consultation.