Loan agreements and promissory notes (2024)

FAQs

Loan agreements and promissory notes? ›

A loan agreement serves a similar purpose as a promissory note. Like a promissory note it is a contractual agreement between a lender who agrees to loan money to a borrower. However, a loan agreement is much more detailed than a promissory note. There are two types of loan agreements.

Although it is legally enforceable, a promissory note is less formal than a loan agreement and is suitable where smaller sums of money are involved. However, its terms - which can include a specific date of repayment, interest rate and repayment schedule - are more certain than those of an IOU.

In many ways, a promissory note functions as a kind of IOU document, although in practice it is more complex. However, it is also much more informal than a loan agreement and does not legally bind the lender in the same way, although the borrower is still bound to the promissory note.

This can be done by the borrower issuing a unilateral instrument. The terms "promissory note" and "loan note" are often used interchangeably to describe the unilateral instrument, particularly on cross-border reorganisations.

A promissory note is a written agreement between one party (you, the borrower) to pay back the loan issued by another party (often a bank or other financial institution). Anyone lending money (like home sellers, credit unions, mortgage lenders and banks, for instance) can issue a promissory note.

Promissory notes may also be referred to as an IOU, a loan agreement, or just a note. It's a legal lending document that says the borrower promises to repay to the lender a certain amount of money in a certain time frame. This kind of document is legally enforceable and creates a legal obligation to repay the loan.

A promissory note can become invalid if it lacks essential elements, such as the borrower's signature, the principal amount, and the repayment terms. Invalidity may also result from non-compliance with legal requirements or if the note was created under duress or fraudulently.

Key takeaways

A loan agreement is a contract between a borrower and a lender that specifies what each party has agreed to. A promissory note is where one party promises, in writing, to pay a set amount to the other according to their agreement.

A loan agreement (also known as a lending agreement) is a contract between a borrower and a lender which regulates the mutual promises made by each party. There are many types of loan agreements, including "facilities agreements", "revolvers", "term loans", "working capital loans".

Secured and unsecured loans

Promissory notes are legally binding whether the note is secured by collateral or based only on the promise of repayment. If you lend money to someone who defaults on a promissory note and does not repay, you can legally possess any property that individual promised as collateral.

What are the disadvantages of a promissory note? ›

Disadvantages of a Promissory Note

Unlike a secured loan that comes with collateral, a promissory note is often unsecured. If the issuer defaults, the payee may face difficulty recovering their money. The payee may need to pursue legal action, which can be expensive and time-consuming.

Monetary damages: The most common remedy for breach of a promissory note is a monetary award, which may include the amount of the principal owed, any interest that has accrued, and any fees or penalties agreed to in the promissory note.

The lender will keep the original promissory note until the loan is paid off. There may be some circ*mstances, such as during a refinance, where the loan terms (and therefore, the promissory note terms) change and you will likely be issued a new document to sign.

The key differences between a mortgage and a promissory note can be summarized as follows: The purpose of the document. A mortgage creates a security interest in the property (a lien) for the lender, while the promissory note serves as the borrower's written promise to repay the debt.

Even if a promissory note is lost, the legal obligation to repay the loan remains. The lender has a right to “re-establish” the note legally as long as it has not sold or transferred the note to another party.

The debt owed on a promissory note either can be paid off, or the noteholder can forgive the debt even if it has not been fully paid. In either case, a release of promissory note needs to be signed by the noteholder.

Foreclosure and Legal Actions

Even if a promissory note is lost, the legal obligation to repay the loan remains. Borrowers may not avoid foreclosure on their property, for example, simply on the basis of a lost promissory note.

Final answer: A loan agreement typically covers the amount of the principal, the interest rate, and the payment schedule but does not include the national economic forecast.

Promissory Notes Are Legal Contracts

A promissory note or promissory letter is a legal instrument similar in nature to any common law contract. In order for a contract to be enforceable, it must contain certain legal conditions such as an offer and an acceptance of that offer.