Promissory Note
Formally document a loan between two parties with clear repayment terms.
What Is a Promissory Note?
A promissory note is a written, legally binding promise from one party (the borrower) to pay a specific sum of money to another party (the lender). It details the principal amount, interest rate, repayment schedule, maturity date, and what happens in the event of default. It's more formal than an IOU but less complex than a standard loan agreement.
Secured vs Unsecured Notes
Secured Promissory Note
The borrower pledges collateral (like property or a vehicle) that the lender can seize if the borrower defaults on the loan. Offers more protection for the lender.
Unsecured Promissory Note
Not backed by collateral. Based solely on the borrower's promise to repay. Typically used for smaller amounts or between trusted family members and friends.
Key Terms Included
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