How to enforce a promissory note
Who is the Borrower?
The Borrower is the person or corporation that receives value (money, property or some service) from the Lender on the condition that the Borrower will pay the principal amount plus any interest to the Lender at sometime in the future.
Who is the Lender?
The Lender is the person or corporation that gives something of value (money, property or some service) to the Borrower on condition that the Lender will be paid a certain amount in the future.
What is the governing law for a Promissory Note?
The governing law is the law of the jurisdiction in which the promissory note will be entered into. Often the parties select the jurisdiction where the Lender resides. If the promissory note relates to the purchase of certain assets, then the location of those assets is selected.
What is the Principal amount?
The principal is the original amount of the note that is owed by the Borrower to the Lender on the date the Promissory Note is signed. Once the Borrower has begun to pay back the note, the principal refers to the amount of money still owing to the Lender at any given moment in time.
What is interest?
Interest is an amount charged to a Borrower for the use of the Lender's money. It is usually expressed as a percentage of the amount borrowed and is calculated at a specified interval over the course of the term of the Promissory Note. The interest rate is the annual interest rate.
What does compounded mean?
Compounded refers to how frequently the interest is calculated and added to the principal amount of the note to arrive at a new balance. The more frequently the interest is calculated, the more interest the Borrower will end up paying to the Lender.
What is a demand promissory note?
The balance owing in a demand promissory note does not need to be paid until the Lender demands to be repaid. In other words, the loan is repayable 'on demand'. There is no fixed end date for the repayment of the note. Upon demand, the Borrower is given a certain period of time to repay the outstanding balance of the note.
What is the difference between a Promissory Note and a Loan Agreement?
Both contracts evidence a debt owed from the Borrower to the Lender, but the Loan Agreement contains more extensive clauses than the Promissory Note.
What is the Term?
The Term is the time length of the note. At the end of the term, the Borrower must repay the outstanding balance of the note.
Promissory Note Details
I am a shareholder. Should I use the Loan Agreement, the Shareholder Loan Agreement, or the Promissory Note?
As a shareholder. if you are lending money to the corporation. use our Shareholder Loan Agreement. If you are borrowing money from the corporation,
use either our Loan Agreement or promissory note. If you want an extensive contract, use our Loan Agreement. Use our promissory note if you prefer a standard basic contract.
Do I have to charge the Borrower interest?
No, the Lender can choose whether or not to charge interest. If the Lender decides to charge interest, they can pick how much interest to charge. However, there may be tax consequences to the Lender or Borrower if interest is charged but it is not a reasonable rate.
What are the payment options available?
There are four options for the method of repayment.
- Specific periodic amounts - the Borrower will make a certain payment to the Lender on regular intervals.
- Lump sum payment at the end of the term - the Borrower pays nothing to the Lender until the end of the note term, at which time the Borrower repays the entire note in one payment.
- Interest only - the Borrower makes regular payments to the Lender that are put toward paying off the interest on the principal amount only, with no portion of the payment going towards the principal amount itself.
- Interest and principal - the Borrower makes regular payments to the Lender that are put toward paying off both the principal amount and the interest as it is compounded. At the end of the term of the Loan Agreement, there will be no outstanding balance to be repaid.
Should the Borrower be able to pay the Outstanding Principal without penalty?
Granting this option enables the Borrower to pay the outstanding balance at any time without having to pay an additional sum as a penalty. If the Lender is making this loan as an investment, the Lender may not want to allow prepayment without a penalty as the lender would incur expenses and possible lost income in reinvesting this amount.
Should the Lender require the Borrower to provide security/collateral for the note?
If you do not take collateral. and the Borrower defaults on the note, you will have to take the Borrower to court in order to recover your money and your judgement can only be enforced against certain assets of the Borrower. However, if you take collateral for the note, then you may be entitled to seize and sell the collateral if the Borrower fails to repay the note.
Does the collateral need to be equivalent in value to the note amount?
No, if collateral is given for the note, it can be for any amount. If the Borrower fails to repay the note, and the collateral is worth less than the note, then the Lender can seize the collateral and sue the Borrower for the remaining amount of the note. If the Lender recovers more than the outstanding balance from the sale of the collateral, any surplus amount would be returned to the Borrower or his other debtors depending upon the situation.Source: wiki.lawdepot.co.uk