For example, assume you loan money to a friend and execute a promissory note. The promissory note requires your friend to repay the amount loaned, plus interest, on a certain date. At this point, you are considered the “holder” of the promissory note, because you have possession of the note and can ask your friend, “the borrower,” for the amount of money owed on the date agreed upon. However, because a promissory note is usually negotiable, you may transfer your right to collect to your brother. If you do this, your brother will become the holder of the note and will be able to ask your friend for the money owed when it becomes due. However, let’s now assume the promissory note was made non-negotiable. If this is the case, you will not be able to transfer your rights as the holder to another person (i. e. , your brother), and only you will be able to collect from the borrower (i. e. , your friend). Understanding the idea of a negotiable instrument will help you in creating a promissory note that achieves your desired intentions (i. e. , whether you want the note to be negotiable or non-negotiable).
The most common example of a draft is a bank check. [6] X Research source A bank check effectively orders a bank to pay the person presenting that check the amount owed. [7] X Research source The most common example of a note is a promissory note, which you know is a promise by a borrower to pay a holder an amount owed. [8] X Research source
The note be in writing, be signed, and promises the payment of money; The promise must be unconditional; The amount of money must be a fixed amount (with or without interest); The instrument must be payable to holder; The promise must be payable at a definite time; and The promise must not include any other act in addition to the payment of money. [9] X Research source
With this type of loan, you will include a payment provision in your promissory note that looks like this: “In return for a loan Borrower has received from Lender, Borrower promises to pay to Lender the amount of $[total loan amount - principal]. Borrower will make equal installments of $[monthly payment amount] per month until the principal is paid in full. Payments will be due on the [date of monthly payments] day of each month, beginning on [date first monthly payment due]. “[11] X Research source This type of payment plan is good for loaning small amounts of money to people you are close with. If you are making a loan of more than $10,000 with no interest, the Internal Revenue Service (IRS) may require you to pay taxes in an amount that reflects interest, even if you received none. [12] X Research source
If you choose this type of loan, consider a payment provision that looks like this: “In return for a loan Borrower has received from Lender, Borrower promises to pay to Lender the amount of $[loan amount - principal], plus interest on unpaid principal at the rate of [interest rate]% per year from the date this note is signed until it is paid in full. Borrower will pay back the loan in monthly amortized installments, which include principal and interest, of not less than $[minimum payment] until the principal and interest are paid in full. “[14] X Research source This type of payment option is great for loaning larger sums of money. If you are loaning more than $10,000 to someone, include interest so you avoid the potential adverse tax consequences that may otherwise arise. [15] X Research source
If you are creating a lump-sum payment provision with interest, use this language: “In return for a loan Borrower has received from Lender, Borrower promises to pay to Lender the amount of $[loan amount - principal], plus interest on unpaid principal at the rate of [interest rate]% per year from the date this note is signed until it is paid in full. Borrower will repay the entire amount owed by [due date]. “[17] X Research source If you are creating a lump-sum payment provision without interest, use this language: “In return for a loan Borrower has received from Lender, Borrower promises to pay to Lender the amount of $[loan amount] by [date payment is due]. “[18] X Research source A lump sum payment provision can be used when you want to reduce the potential interest charges incurred by the other party. This is the case because, with a lump sum payment, the party paying back your loan can pay off the loan quicker, therefore avoiding interest payments over an extended period of time.
If you use this type of loan, use the following provision: “In return for a loan Borrower has received from Lender, Borrower promises to pay to Lender the amount of $[loan amount - principal], plus interest on unpaid principal at the rate of [interest rate]% per year from the date this note is signed until it is paid in full. Borrower will pay interest of $[amount of interest] on the [date of payments], beginning [date first payment due]. Borrower will pay the principal in full on or before [date by which loan must be repaid], together with any accrued interest. “[20] X Research source Interest only loan payments are great for those that want low payments during the early life of the loan. [21] X Research source This is the case because when you are only making interest payments, they will be lower than a payment that included both interest and principal. However, you may not want to use this type of payment plan if the other party is concerned about the large principal payment that will be due later in the life of the loan.
If you want to make your promissory note negotiable, all you need to say is, “This note is negotiable. " If you want to make your promissory note non-negotiable, simply state, “This note is non-negotiable. "
If you are offering an installment or interest only payment option, consider the following late payment provision: “If any installment/interest only payment due under this note is not received by Lender within [late fee grace period] days of its due date, the Borrower will pay a late fee of [some percentage]% of the amount of the monthly payment. The late fee will be due immediately. [24] X Research source If you want to include an acceleration clause, which will allow you to demand payment in full immediately upon the borrower’s late payment, you can use this provision: “If any installment/interest only payment is not received by Lender within [acceleration grace period] days of its due date, Lender may demand, in writing, that Borrower repay the entire amount of unpaid principal immediately. After receiving Lender’s demand, Borrower will immediately pay the entire unpaid principal. “[25] X Research source If you are offering a lump sum payment option, use this provision: “If payment due under this note is not received by Lender within [late fee grace period] days of its due date, the Borrower will pay a late fee of [some percentage]% of the amount of the payment. The late fee will be due immediately. [26] X Research source
If you are choosing to make the loan unsecured, simply state that the note is unsecured. [30] X Research source On the other hand, if you are planning to make your note secured, you will need to include a provision such as this: “Until the principal and interest owed under this note is paid in full, this note will be secured by a security agreement giving Lender a security interest in specified equipment, fixtures, inventory, or other assets. “[31] X Research source You will then have to describe the property, in detail, that you are securing as collateral.
For example, if your contract has a late payment clause, follow that clause and charge the other party a late fee. However, if, after a couple of months of not receiving any payment (including no late fee payments), you should consider confronting the other party and requesting repayment.
