Who makes payment of a promissory?

Why do lenders use promissory notes?

A promissory note is used by a lender as a way to ensure there is legal recourse in the event you do not repay the loan. While many homeowners think they’re paying off the mortgage loan to officially “own” their home, it is actually the promissory note the lender holds until the mortgage repayments are complete that gives them the power to foreclose in the event of default.

Without a legally binding promissory note, a financial institution may not have any legal recourse to foreclose on the home or attempt to get their money back. Often, promissory notes are sold (along with mortgages) on the secondary mortgage market. While a promissory note could get lost in the shuffle of institutions selling loans to secondary lenders, it doesn’t mean you’re off the hook for the amount, as the legal obligation to pay the loan still exists.

Laws vary by state, but a lender may reinstitute a promissory note in some instances.

What’s included in a promissory note?

While each state has its own individual rules governing what must be included in the document, standard items that you might expect to see contained within a promissory note include:

• Borrower name and contact information
• Lender details and contact info
• Principal loan amount
• Interest rate and how it’s been calculated
• Date first payment is required
• Loan maturity date
• Date and place of issuance
• Fees and charges
• Repayment terms and options
• Loan conditions
• Borrower’s signature (this is what makes it legally binding!)

What are the different types of promissory notes?

There are a handful of types of promissory notes, such as secured, unsecured and the aptly titled Master Promissory Note (MPN.)

Can I get a promissory note without a mortgage?

Yes, it’s possible to have a promissory note without a mortgage, if you are evaluating alternative forms of debt to finance your home purchase. In fact, a promissory note may be a way for someone who is unable to obtain traditional financing to still buy a home through what is called a take-back mortgage.

A take-back mortgage effectively allows the home seller to become a lender. If they have the means to do so, a seller can loan a buyer money to purchase the home. In order to do this, the home must be owned outright by the seller (not currently under monthly mortgage), and the buyer (aka the borrower) is required to make regular payments to the seller. It’s the same structure as under a standard home loan through a bank, though typically these loans come at higher interest rate.

Under the terms of a take-back mortgage, the seller retains a proportionate share of equity in the home until the buyer pays back their home loan plus interest in full. As when applying for a traditional mortgage, a promissory note is signed which obligates the buyer to make principal and interest payments according to a preset schedule. Should the buyer default on payments, the seller can foreclose on the property and sell the home.

Secured vs. Unsecured

A promissory note can be secured or unsecured. A secured promissory note requires the borrower to safeguard the loan by putting up items of hard value, such as the home, condominium, or rental property itself as collateral to ensure that sums are repaid.

An unsecured promissory note does not come with these upfront requirements, though you are still obligated to repay the loan. Most commonly, a promissory note will be secured by the home you are purchasing, which also serves as collateral for the mortgage itself. Double duty for the win!

Master Promissory Note

A Master Promissory Note (MPN) is the same as a promissory note – it’s a legally binding document that obligates a borrower to repay a loan and abide by the terms of the agreement. The “master” in front comes from the fact that lenders and borrowers can use a master promissory note across multiple loans, like in the case of federal student loans. (Most often, you will see the MPN terminology used in conjunction with federal student loans.)

A new promissory note must be issued for every new loan. For example, if you ever refinanced a home, you’d sign a new promissory note because a refinanced loan is a new loan. When students take out new loans for a new school year with their lender, they use the same MPN, thus eliminating the need for signing a new promissory note each time.

Learn when a promissory note is negotiable, and how to make a promissory note non-negotiable.

The use of the term "negotiable" when it comes to promissory notes can be confusing. According to Merriam-Webster, one definition of "negotiable" is "open to discussion or dispute." However, in the context of a financial instrument such as a promissory note, the meaning of "negotiable" is a variation of this more commonly used definition.

What Is a Promissory Note?

As its name indicates, a promissory note is basically a promise, put into writing, to pay another person a sum of money. The person making the promise is called the payer, while the person who is to receive the payment is known as the payee. The promise to pay is an unconditional promise; this means your obligation to pay isn't subject to any condition such as requiring that a specific event must first happen, or a particular action must first be taken.

Additionally, promissory notes state the amount to be paid and when payment is to be made, as well as other terms of the indebtedness, such as the interest that will be charged.

Promissory notes are a type of financial instrument known as negotiable instruments. You will likely be familiar with two other commonly used negotiable instruments: checks and money orders. While a promissory note involves two parties (the payer and the payee), checks involve three parties (the payer, the payee, and the bank from which the funds are drawn).

What "Negotiable" Means

The term "negotiable" in "negotiable instrument" refers to the ability of this type of financial instrument to be transferable. When a financial instrument is transferable, it means that the holder of the instrument (the payee) can transfer the instrument to another party without either giving notice to the payer or obtaining the payer's consent the transfer.

Once the instrument is transferred to a third party, that third party becomes the new holder of the instrument, and possesses all the rights the initial payee had under the terms of the instrument. Effectively, when such a transfer takes place, the third party becomes the new payee and is now entitled to payment from the payer of the amount specified. For example, if you've ever endorsed a check, that endorsement is the "negotiation" that transfers the right to the amount of funds specified on the check to the new holder of the check.

The Negotiable Promissory Note

Promissory notes come in various forms, depending on the loan situation in question. For example, a secured promissory note is a promissory note in which collateral, in the form of personal property or real estate, is provided by the payer. In the event of a default by the payer, the payee has the right to seize the collateral to compensate for the non-payment of the loan.

Because promissory notes are negotiable instruments, the basic promissory note is a negotiable promissory note. Therefore, if you, as payer, give a promissory note to someone who has given you a loan, that person can then turn around and transfer or assign the note to a third party.

The Non-Negotiable Promissory Note

There may be instances in which you may not want a promissory note to be negotiable. For example, if the promissory note is drafted as a demand promissory note—one which gives the payee the right to ask for payment at any time—but there is an agreement between you and the payee that stipulates when such a demand for payment can be made, you may not want the promissory note to be negotiable.

In this situation, if you have not made the promissory note non-negotiable, the third party to whom the payee transfers the promissory note obtains the right to payment from you as specified in the note but isn't bound by the terms of the agreement that sets out the conditions governing when the payee can demand payment. To prevent this from happening, then you should use a non-negotiable promissory note; a non-negotiable promissory note will typically include the words "not negotiable."

Promissory notes are a common type of financial instrument in loan transactions. As the payer of such a note, it's important to know that, unless a note expressly stipulates that it is not negotiable, promissory notes are negotiable instruments that can be transferred or assigned by the original payee to a third party.

Who makes payment of a promissory note *?

Who can make a promissory note payable to bearer?

Who is the person who signs a promissory note?

Who receives promissory note?