A promissory note is a written agreement to pay back, at determined
intervals in the future, a certain amount of money. The lender, or
bearer of the money, is known as the creditor, and the person borrowing
the money is known as the debtor.
Whenever money is given as a loan (such as from a bank, for example),
a promissory note will be used. A promissory note could be used for
money given for student loans (educational loans), car loans, or even
Collateral is anything that has value and that can be used to secure the
note or ensure that, if you do not make the payments, the lender or
promissor will get something of value to cover the loan. Usually, banks
want the value of the collateral to be at least as much as the loan
itself. This protects the lender from defaults (see below) on the loan.
Many times, such as if you buy a car for instance, the car itself can be
the collateral of the loan. If the money is given for buying a home,
the security interest is usually called a mortgage note.
Many times, a bank will ask that someone else come in and sign the note
with you. These people are called cosigners, and by signing, they state
that they will also be fully responsible for payments made on the loan.
This means that if you do not make your payments, the bank has someone
else they can look to in getting their money back. Usually, cosigners
are necessary for people with bad credit, or for those who do not have
much credit established.
Defaulting is failing to make a payment within the specified time, as
determined by your repayment schedule. This not only affects your credit
rating, but it can cause the lender to foreclose on the loan (also
called "calling the note"), which means that the lender can order that
the money be paid back in full right away. In other words, defaulting is
very bad and is something that you definitely do not want to do.
Missing a Payment
Most importantly, you should tell the lender. Many times, they will give
you an extension of time, or maybe even allow you to miss a payment or
two. They are not obligated to do so, but being honest and up front with
your lender will save you a lot of time and hassle. Remember, they want
to help you because they want their money back. Often times, such as in
the case of student loans, a forbearance or deferment will be allowed,
especially in times of financial hardship. These are grace periods where
you do not need to make payments. Watch out, however, because interest
usually does accrue during these periods.
Defaulting on a Loan
First, the lender will probably call the note, meaning that the full
remainder of the unpaid portion of the loan becomes due. If you cannot
pay, the lender may repossess the collateral, meaning they come and take
it from you. They will then sell the collateral to get their money
back. If the proceeds of the sale exceed the amount owed, the remainder
will be given back to you, less any expenses the lender incurred in
repossessing. If the proceeds do not cover the amount owed (and most of
the time they do not), the lender can bring legal action against you, or
any cosigner, for repayment. With a court judgment, they are able to
garnish your wages to recover the debt.
Get It in Writing
If you are borrowing money from a family member or friend, or if you are
loaning money to a family member or friend, get it in writing. A
written document is one of the most important things you can have if
there is a problem. The document should state who is loaning the money,
who is receiving the money, how much money, and when the money is to be
paid back. If interest is also part of the loan, the rate of interest
should be noted. The parties involved in the loan should both sign and
date the document. For extra protection, you may wish to have the
signatures occur before a notary public.
If you end up in court, a written document will be the best evidence to
help you with your side of the case. If you make or receive payments on a
loan, be sure to keep track of them and document your account with
check receipts, bank statements, or even a piece of paper showing the
dates and amounts that were paid. If a payment is made in cash, make
sure that the lender issues a receipt, preferably signed by the lender,
to the borrower. Cash should not leave the borrower’s hand if a receipt
is not going to be issued. If the lender refuses to issue a receipt,
then the lender should be paid with a money order, cashiers check,
check, or any method of payment that can be tracked and documented. When
the entire amount of the loan has been paid, the person who borrowed
the money should ask for a signed, written release showing that
everything has been paid in full. If the terms of the loan change, the
parties should put it in writing. BOTH parties should have a copy or
original written agreement for their records.