What is a Promissory Note? - Free Sample Promissory Note
A promissory note is a totally different element from the deed of trust. From the word itself, it signifies the promise to repay a loan or debt on the terms and conditions agreed by both the borrower and lender. A promissory note doesn’t require recordation or publication, unlike the deed of trust that goes in public records. The lender holds the promissory note the entire time the loan is active. When the loan is fully paid, it will be marked “paid in full” and returned to the borrower along with the recorded Reconveyance of Deed.
Generally a Mortgage Promissory Note Contains:
- The names of all parties involved, referring to the promisor/obligor and the promisee/obligee relating to the person making the promise and whom the promise is made to, respectively.
- The amount of the obligation.
- Specific terms and conditions, like the terms of repayment and applicable interest rate, etc.
- An acceleration clause may also be included
There are a few things to be considered by both parties involved before finalizing a promissory note, like the security of the loan, the usury laws, and late fees.
The security of the loan guaranteed by a promissory note potentially left the lender vulnerable to bankruptcy. This means that when the borrower declares bankruptcy, all debts secured by promissory note will be repaid after all debts made to secured creditors have been paid. In this rate, the likelihood of recovering the balance of the loan is practically none. That is why it is rational to get “security” for loans involving huge amounts of money. So if you are a lender loaning through an unsecured promissory note, be prepared for this scenario. Consult a lawyer to create a safety net and learn how you can recover what is due to you.
As promissory note puts the lender in a weak spot in terms of security, it is also predatory in interest rates. In fact, promissory notes can be referred to as loan sharking. The lender and borrower must be careful not to breach the state usury law since usurious acts can be considered criminal offense with severe consequences, that is, depending on the jurisdiction. In some states, any interest made on a usurious loan is applied to the principal balance of the loan, transforming it to a loan with good zero interest. Oftentimes, individual lenders are restricted to charging lower interest rates compared to credit card companies and banks. Again before finalizing your promissory note, check your local interest rate regulations to be sure that you abide by the law. The same rule applies to charging fees on late payments made to a loan secured by a promissory note. A lender cannot just penalize a borrower without considering what is permissible by law.
Promissory note for a real estate/mortgage transaction
Many borrowers going through real estate transactions or improvement opted to lend through a promissory note since it is quick, less documentation and could be no up-front fees involve. Loans for this purpose can be too much for a promissory note as it could not provide sufficient shelter to the lender in the event of a loan default.
However, if it cannot be avoided, the best way to secure the loan is to file a mortgage lien so that it can be recorded as public document which will subsequently impose obligation to the borrower/purchaser of the property, plus of course the knowledge that it is secured by the real estate. This provides protection to the lender. Even if the property in question is sold or transferred or the borrower goes bankrupt, automatically the lien or mortgage is carried on, unless discharged at the time it was sold.
A lot of office supply stores nowadays are selling mortgage forms. But it is still wise to seek assistance from a mortgage lawyer to be guided accordingly on the right forms to use, exact data required in completing the forms, proper documents to gather, and for filing to the Register of Deeds for recording.
The same goes for a promissory note. It must sufficiently possess correct information between the borrower and lender to legalize the transaction. Like the mortgage forms, state-specific promissory note forms can also be bought at office supply stores. But as every now and then regulations change, the instructions may be out of date. You can also buy or download a possibly much updated form online. Please check that the form you purchase online is specific to your jurisdiction. Here is a sample promissory note form that you can use for reference.
Free Sample Promissory Note
On this date of [DATE], in return for valuable consideration received, the undersigned borrower[s] jointly and severally promise to pay to [LENDER'S NAME], the "Lender", the sum of $[DOLLARS] Dollars, together with interest thereon at the rate of [RATE] percent ([RATE]%) per annum.
[Select from the following provisions, as desired]
Terms of Repayment: This loan shall be repaid under the following terms: [describe terms]. All payments shall be first applied to interest and the balance to principal.
Terms of Repayment (Periodic Payment): Starting on [DATE] and continuing until the principal balance of this Note and any accrued interest have been repaid in full, on the [DATE] day of each month the borrowers shall pay the amount of $[AMOUNT]. All payments shall be first applied to interest and the balance to principal.
Terms of Repayment (Balloon): Starting on [DATE] and continuing thereafter from month to month until the date of [DATE2], the borrowers shall make payments of interest only in the amount of $[AMOUNT]. On [DATE2], final payment is due in the amount of $[BALANCE].
Payable On Demand: The entire unpaid principal and accrued interest thereon, if any, shall become immediately due and payable on demand by the holder of this Note.
Late Fees: In the event that a payment due under this Note is not made within ten (10) days of the time set forth herein, the Borrower shall pay an additional late fee in the amount of $[AMOUNT].
Place of Payment - all payments due under this note shall be made at [DESIGNATED LOCATION], or at such other place as the holder of this Note may designate in writing.
Prepayment - This Note may be prepaid in whole or in part at any time without premium or penalty. All prepayments shall first be applied to interest, and then to principal payments in the order of their maturity.
Default - In the event of default, the borrower[s] agree to pay all costs and expenses incurred by the Lender, including all reasonable attorney fees (including both hourly and contingent attorney fees as permitted by law) for the collection of this Note upon default, and including reasonable collection charges (including, where consistent with industry practices, a collection charge set as a percentage of the outstanding balance of this Note) should collection be referred to a collection agency.
Acceleration of Debt - In the event that the borrower[s] fail to make any payment due under the terms of this Note, or breach any condition relating to any security, security agreement, note, mortgage or lien granted as collateral security for this Note, seeks relief under the Bankruptcy Code, or suffers an involuntary petition in bankruptcy or receivership not vacated within thirty (30) days, the entire balance of this Note and any interest accrued thereon shall be immediately due and payable to the holder of this Note.
Joint and Several Liability - All borrowers identified in this Note shall be jointly and severally liable for any debts secured by this Note.
Modification - No modification or waiver of any of the terms of this Agreement shall be allowed unless by written agreement signed by both parties. No waiver of any breach or default hereunder shall be deemed a waiver of any subsequent breach or default of the same or similar nature.
Transfer of the Note - The borrowers hereby waive any notice of the transfer of this Note by the Lender or by any subsequent holder of this Note, agree to remain bound by the terms of this Note subsequent to any transfer, and agree that the terms of this Note may be fully enforced by any subsequent holder of this Note.
Severability of Provisions - In the event that any portion of this Note is deemed unenforceable, all other provisions of this Note shall remain in full force and effect.
Choice of Law - All terms and conditions of this Note shall be interpreted under the laws of [JURISDICTION].
Signed Under Penalty of Perjury, this [DATE] day of [MONTH], [YEAR],
_______________________________________
Borrower(s)
[Note- each borrower should sign separately.]
Signed in the presence of:
_______________________________________
Witness
[Note- the lender may not be a witness. If more than one witness is used, each should sign separately.]
