In its simplest form, a promissory note is an agreement between two parties. One party, the maker or issuer, needs money, and the other party, the payee or purchaser, has money to lend. The note will have language describing the rights and obligations of both parties. Other terms in the note are usually the principal amount, the maturity date and steps that will be taken to collect on the note if the maker fails to pay.
In return for lending the money, the purchaser will have the right to collect payments according to schedule. Terms may call for monthly or quarterly payments, for example, or a one-time payment of principal and interest at the maturity of the note. Payment terms are usually negotiable, but a fundamental purchaser's right is the right to recover the money she gave to the issuer.
If the maker fails to pay as scheduled, the promissory note is in default. There will be a paragraph or section describing in detail the purchaser's rights to collect. These may include accelerating the payment schedule to demand immediate payment of the full amount due, requiring additional collateral if the note is secured, or the right to recover attorney fees and other costs of collecting on the note.
Secured With Collateral
Secured promissory notes have collateral pledged to the purchaser to help him feel comfortable in making the loan. Usually, the collateral value equals or exceeds the loan amount. If the issuer defaults, the purchaser has the legal right to take the property and sell it to recover his money.
Unsecured promissory notes do not provide collateral, but they still confer specific rights for a purchaser to recover her money. They are offered based on the financial strength of the other party and his creditworthiness. Purchaser rights in unsecured notes usually include the right to sue for the principal and interest owed, plus attorney fees and court costs. If the issuer is an individual, the purchaser may also have the right to report the default to credit reporting agencies, giving the issuer added incentive to settle the debt and protect his credit score.
Based in Atlanta, Steve Walker has a 28-year background in commercial and retail banking. Throughout his career, Walker has written extensively on behalf of his small business clients, analyzing their financial condition and making recommendations on their borrowing options. He holds a Bachelors degree in business administration from Furman University.