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Secured and Unsecured Notes
A promissory note is a legal and binding document, and should ALWAYS be honored by both parties. If there are any changes in the stated terms and conditions, they should be duly formalized in writing.
Promissory notes can either be both secured and unsecured. Secured promissory notes are usually backed by a form of collateral put forth by the maker. This can be in the form of real estate, an automobile or a even a luxury boat or aircraft.
If and when a maker defaults on a loan, the payee where a secured note is in place has the peace of mind that a legal attachment to the collateral is always possible.
Unsecured Notes Offer No Collateral
However, unsecured notes offer no collateral whatsoever. Such notes are oftentimes used in more informal cases of persons loaning one another a small amount of money.
An unsecured promissory note will always be outdone by secured liens; if in the unlikely event that a maker defaults.
The payee of an unsecured note will oftentimes have to wait untill other secured creditors are paid before he or she can secure payment on their unsecured note.
When you consider this, the payee of an unsecured note is wise not to loan an amount of money than he or she is willing to lose.
Potential Problems With Usury Laws
There is a dilemma the payee could encounter and that is to do with State usury laws, which can vary greatly from state to state. These usury laws relate in a different way to say commercial banks than they do to private persons who lend money.
Usury laws place a legal cap on the interest rate that the payee is permitted to charge. Interests rates in some cases can break state usury laws, and can carry both civil and criminal penalties.
More recently it's been the maker (not the payee) who has had to watch out with notes. Corporations use promissory notes as a "tried and true method"of raising capital.
However in the case of a note between person-to-person is often a less fancy agreement, but the corporation-to-individual promissory note is in most cases much more complex.
It's for this specific reason that corporate promissory notes are for the most part sold not to the public but instead to more sophisticated buyers who are quite capable of carrying out their own due diligence.
Such promissory notes are more often than not classified as securities, and anybody trying to sell them on behalf of a corporation must be registered with the "Securities and Exchange Commission" or an equivalent State department.
Notes & Financing
One of the biggest problems home buyers usually encounter is the lack of sufficient liquid finances to fully pay off the purchase price of say a home or piece of property.
What most buyers do is they try and secure a loan from a large lending authority or a commercial bank, and the payment terms are then legally formalized by making use of a note.
Notes in essence, is a legal document which clearly shows who the parties are, the full dollar amount that is being entered into, the specific rate of interest that will be incurred, along with late penalty fees, and the payment terms (simply put, how much and how often) which is agreed upon by the lending institution and the borrower.
What is crucial in a promissory note is the specific terms of payment. There usually are four methods of payment, and the buyer can choose the terms which he or she feels the most comfortable with.
A borrower can pay in equal monthly installments; equal monthly installments including a final balloon payment; the interest up front, and the final payment much later; or simply a one time full payment of the principal and the interest combined.