Various Types of Promissory Notes

Promissory notes are used as a document to record the details of the loan transactions between two or more individuals. The documentation promises that the money borrowed will be paid back to the lender within a specified time. These can be created at any time of the loan for ensuring the secure payments. Any kind of loans must be documented using this note, no matter whether the loan is a simple payment to be made for a family member or a friend. The note has legal validity by which the borrower is legally tied to keep the promise of payment as per the agreements in the note.

A well written document should contain the repayment terms, repayment amount and interest charged, maturity date and in case of non-payment what action should be taken. This documentation is considered as a good idea for record-keeping and payment of tax for loans taken between individuals. Once this document is signed by both the borrower and lender, the borrower is agreeing to the terms and conditions written in the document. The borrower should pay back the amount within the timescale showed in the note or else the lender can take legal action against the debtor. Based on the loan type, there are various types of promissory notes.

1. Commercial

This kind of note is documented according to the terms agreed by the lender and the debtor. In this case, the lender can legally take action against the debtor by acquiring the assets of the borrower as mentioned in the document, if the debtor cannot repay his/her loan. The lender can demand for immediate full payment after the maturity date and don't have to wait for long to obtain the money as installments from the person. Commercial promissory note includes strict conditions and some additional legal conditions.

2. Personal

In most of the cases, there will be only verbal agreement between family members or friends when you borrow money from them. But verbal agreement does not have legal approval in courts as you don't have any proof on the loan borrowed from you. A personal promissory note will provide good faith on the borrower and a security to the lender. You will get these notes from supply stores or can be downloaded. You should include the amount borrowed, terms and conditions for repayment, interest rate and what action to be taken if the money is not repaid.

3. Real Estate

This type of note will secure the loan borrowed by the debtor, but if she/he fails to do so, the lender has to pay the loan. So lender must include a mortgage for the loan given to the borrower which provides security to the lender when the borrower does not repay the loan.

4. Investment

These notes are used in businesses where the investors are the taking the risk of losing money. So the investment promissory note is making the borrower to repay the loan disregarding the success of the company. In this case, the note is functioning as a currency with legal value which can also be traded.

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