How To Secure A Promissory Note

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A note is a document that a borrower signs to promise to repay a loan. The note by itself creates a legal obligation. However, by itself, the note is taken into account “unsecured,” which suggests that if the borrower is unable to pay, there might not be much that you simply can do about it. To “secure” a note means you identify some specific property and fasten it to the note. Then, if the borrower defaults on the loan, you’ll be ready to repossess the collateral as compensation for the loan. the tactic of securing the note varies counting on the sort of collateral and therefore the laws where you reside .

Promissory Notes

Financial lending and borrowing between family and friends is completed on the idea of trust. However, the terms of such financial transactions are often unclear, which can cause confusions regarding the payback of the loaned amount. this will find yourself straining the connection between the involved parties. A note may be a unique financial instrument which binds the borrowers by law to pay the lender the required sum of cash at a specified date or on demand. Promissory Notes are negotiable instruments issued under the Negotiable Instruments Act and may be of various types, like with single or joint borrowers, to be paid on demand or on installments, payment to be made during a payment , with interest or without interest.

Types of Promissory Notes – Secured or Unsecured

A note could also be secured or unsecured. just in case of a secured note, the borrower are going to be required to supply a collateral like property, goods, services, etc., within the event that they fail to repay the borrowed amount. the worth of the collateral being provided must be more or adequate to the quantity that’s being borrowed. N case of an unsecured note , no collateral must be provided. An unsecured loan is straightforward to urge if one features a health credit score.

Securing a automobile Loan

Attach the collateral to the loan. To “attach” collateral may be a legal term meaning you want to identify the precise property which will be the collateral for the loan. A automobile is pretty easy to spot , by its Vehicle number (VIN) and by a quick description of the make and model. because the lender, you’ll got to have your borrower sign a security agreement that contains this description and makes regard to the loan.

Creating a Secured land Loan

Have the borrower sign a mortgage agreement. A mortgage may be a legal term wont to describe an agreement between the parties that certain land are going to be given as collateral to secure a loan. the only mortgage just must identify the parties, describe the loan, and identify the property. counting on the quantity of the loan and therefore the identities of the parties, some mortgage documents can become quite complicated.

Some online resources exist to assist you create your own mortgage agreement. One such resource is Rocket Lawyer, which provides templates that are valid for many U.S. states. you merely identify your state, provide the small print of your loan, and therefore the program creates a mortgage document for you.
you ought to have the mortgage witnessed and notarized. In some states, this is often a requirement, such failure to try to to so will nullify the mortgage. In others, it’s going to not be required but remains an honest practice.

Using Inventory or Other Business Assets as Collateral

Attach the loan to some company assets. If you’re giving a loan to a corporation or to a private who is working a business, you’ll want to secure your loan with some property of the business. this might include the company’s own equipment, inventory that it’s purchasable , or maybe something less tangible, like its assets . to connect the loan to any such property, you’ll got to have the owner sign a financing statement, which is usually also mentioned as a “UCC” or “UCC-1” statement. A sample UCC-1 is out there at

take care that the individual or company signing the financing statement is that the actual owner of the collateral. for instance , if you’re giving a loan to Smith , a private , and Smith is that the president of XYZ Corporation, you’ll got to identify carefully whether the collateral is owned by Smith or by XYZ Corporation. The person or company giving the collateral should be an equivalent because the person or company getting the advantage of your loan.

Non-Recourse note

If you employ your business property to secure a note , you ought to negotiate to incorporate a “non-recourse” provision within the note — which suggests that the lender cannot sue you personally for repayment of the note. The lender’s only choice to collect on a non-recourse note is to foreclose on the property that’s securing the note. to incorporate a non-recourse provision during a note , you’ll need to pledge business property of sufficient value to pay the whole note within the event of a default.

Securing a Loan with Other personal estate

Attach the loan to some identified collateral. If you’re lending to a private , you’ll wish to secure your note with a number of that person’s personal estate . personal estate are often anything that’s not a automobile or land . this might include anything of sufficient value, like an enormous screen television, bank accounts, valuable antiques, or anything you identify.


  • the wants for perfecting a interest in most sorts of property are very specific. Particularly if large amounts of cash are involved, you ought to consult a lawyer to form sure that you simply satisfy all the wants correctly.
  • this text focuses totally on the laws of the us . Although procedures are generally similar, you ought to consult an area attorney if you reside in another country or if you’re handling a borrower who lives in another country.
How To Secure A Promissory Note

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