Function of a Promissory Note

• All promissory notes need to have a document stating the names of the lender, borrower and any other parties involved. The documentation also identifies the terms of the loan, such as who must pay what, how much the person must pay and the time frame within which the person must repay the loan. The documentation in a promissory note can also include the interest rate that must be paid in addition to the loan, as well as any clauses, such as an acceleration clause, which nullifies the agreement if the borrower misses a scheduled payment.
  
  

Benefits of a Secured Document

• Lenders should be warned of the type of security agreements entered into. With an unsecured document, the borrower can file bankruptcy and leave the lender out of money. Therefore, a lender should have a borrower sign a secured document, unless the lender is prepared to lose the money he has loaned out if the borrower defaults on a payment. The secured loan will help a lender ensure that he can eventually recover the balance of the loan.
  
  

Type of Promissory Note

• The type of loan a lender is loaning out determines the type of documents needed to secure the promissory note. Those lenders who want the authority to take a borrower to court without the borrower claiming defenses need to have the borrower sign a cognovit or confessed judgment. This borrower is allowing the lender a judgment to be made against her in a court of law when she fails to make a payment.
  
  

Prevention

• To prevent losing money with a real estate loan, documentation other than the promissory note is needed. With a real estate loan, a lender will need to file a lien or mortgage to secure the loan. If the borrower defaults on a loan, this documentation entitles the lender with protection in the event that the borrower goes bankrupt or defaults on the real estate loan.
  
  

Considerations

• A lender must take into consideration that all documents of the promissory note must be signed by all parties before it is considered legally binding. If the note is missing a signature, the promissory note could be considered invalid in a court of law. Those lenders and borrowers who are unfamiliar with legal terms and documentation should consider consulting with an attorney to ensure all forms and signatures are valid and filled out correctly.