A promissory note is a written contract that specifically deals with agreements between a person who wants to lend money and a person who wishes to borrow. As the name states, it is a promise to pay back the funds. As the lending party, the advantages of getting the borrower to sign a promissory note largely outweigh any downsides.
A promissory note lists key details of a loan arrangement, including the principal (payback) amount and due date or payment. It clearly identifies both the borrower and lender by name and contact information. If the lender requires interest as a condition of the agreement, it also shows the interest rate and whether the calculation is based on simple or compounding interest.
Clarity Regarding Default Terms
One advantage of having a promissory note is that it clearly outlines all terms of the borrowing arrangement so as to avoid unnecessary disputes. The note also commonly lists terms of default, such as an acceleration of the debt’s due date. Also, if the borrower pledges collateral in case of default, such as a valuable piece of jewelry or car, the lender can use the note to attempt to claim the asset.
Document Loan and Purpose
With a promissory note the purpose of the loan is outlined clearly on paper. This is very useful information to have on hand for the lender’s records. If the loan is properly documented, the lender might be able to write off the debt for a tax deduction. Otherwise, without proof of the agreement the loan is likely to be considered a gift -- especially if the loan is between two family members.
Use the Note for Justice
Another advantage of a promissory note is that it is clear evidence if the lender wants to seek a judgment in court. Oftentimes, with verbal lending agreements the borrower’s story conflicts with that of the lender or the borrower denies responsibility for the loan outright. A thoroughly written and signed promissory note helps eliminate those concerns.
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