The Key Components of a Promissory Note

The Key Components of a Promissory Note
  • Opening Intro -

    As explained by the SEC, a promissory note is a debt obligation, one that is similar to an IOU or a loan.

    Promissory notes are sometimes used as a fund-raising tool by companies, as a way to attract investors, individuals that may receive a periodic payout for offering a note.

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Standard promissory notes are easy to draft, provided that the following key components are included.

Borrower and Lender Details

A promissory note outlines information about both parties including the names, streets addresses, city, state and zip code of each party. Contact information, including phone numbers and email addresses, may also be exchanged. This information should be kept up to date with changes appended to the note.

The date that the promissory note is signed must be listed too. Personal information about the borrower can include his date of birth, a driver’s license number and a Social Security Number. The business’ Employer Identification Number may also be listed.

Loan Information

Every promissory note outlines loan information including the loan amount, loan period, the interest rate and a payment schedule.

Notes will also include a payment address or method. For instance, the borrower may require that a certain fixed sum be electronically deposited monthly into a bank account. Or, the lender may stipulate that funds be sent to a certain physical address.

Legal Language

There is certain legal language associated with promissory notes. Generally, a note will identify the undersigned (borrower) and the payee (lender), sometimes using the terms “maker” and “holder” respectively identify the parties.

The first paragraph usually outlines the amount of the note, the interest due, followed by other terms and conditions. That latter information can explain how interest is accrued, how much payments are and when due, the deed of trust attached and related costs including attorney fees.

By the way, the deed of trust typically is property that is secured to cover the promissory note in the event of a default. The collateral could be a personal home, business property, equipment, jewelry and anything else of value.

Signatures

Each party to a promissory note must date and sign it. Witnesses may be required too. For large sums of money, an attorney review may be required before both parties sign off on the promissory note.

Warnings

Like any debt instrument, a promissory note must be paid off. The SEC also warns consumers that fraudsters often use such notes to commit crimes, typically against the elderly. Business promissory notes may be another matter, however care should be taken when agreeing to any type of debt arrangement.

Lastly, promissory notes are sometimes sold. The holder of the note, like any lender, may decide to sell it to a new party. If you are a borrower, you need to know the name and contact information of the new lender, to ensure that future payments go to right party and in a timely manner.

References

U.S. Securities and Exchange Commission: Promissory Notes — http://www.sec.gov/answers/promise.htm

Street Directory: Tips on Selling your Promissory Note — http://www.streetdirectory.com/travel_guide/75616/real_estate/tips_on_selling_your_promissory_note.html

See Also — How to Avoid Becoming a Foreclosure Statistic

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Categories: Money News

About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Matt's Musings", his personal blog. Matt covers campus, consumer, business and financial topics on various websites and blogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".