Whenever you enter into a note payable, you have a deadline to satisfy that obligation. This deadline is known as the maturity date. When a note payable reaches maturity, the entire obligation must be repaid, or the lender will declare a default. If you can’t pay off the entire obligation by maturity, you will have to make alternate arrangements with your lender.
The maturity date is specified in the promissory note. The note serves as the contract between you and the lender. The note is a legal and binding contract, so if you fail to pay, the lender can take action against you, including but not limited to judgment, wage garnishment or foreclosure. For this reason, it is important that you read your documents thoroughly and understand exactly when your maturity date is so you don’t run into problems at the end of the term.
At maturity, you will make your final payment. This payment will consist of all unpaid principal, interest and any administrative fees charged by the lender. If you have a fully amortizing loan, you will make the same payment each month from the start of the loan until maturity. Where you can get into trouble is with a balloon loan. A balloon loan has a longer amortization with a shorter maturity. For example, you will make your payments as if you will be paying the loan in 30 years, but the loan matures in five. Since the final payment “balloons” to include a balance that would take you another 25 years to pay in monthly installments, you can be in very bad shape if you don’t realize that maturity is coming.
When you can’t satisfy your note payable by maturity, you can talk to your lender about an extension. With an extension, the lender will require updated financial information, authorization to run a credit report and, depending on collateral, a new appraisal. The lender’s underwriter will review the loan to make sure you still qualify under income and collateral guidelines. If the lender agrees to extend the maturity date, you will sign an extension agreement, which will become an addendum to the original promissory note.
One thing you have to look for when signing a promissory note is whether or not a loan is due on demand. If a loan is due on demand, there is no maturity date. Rather, the lender can demand payment at any time. This is known as “calling the loan.” Even if the note has a maturity date, it is actually called a “soft maturity.” This means that the lender can extend the loan at its discretion or demand payment at any time, typically based on your performance as a borrower.