Many people take loans in order to secure capital for their big financial commitments such as buying a house, starting a business, pursuing education, and many more. Such a huge capital is provided by the lender who receives back the loan payment along with interest from the borrower.
If you are also looking to either lend or borrow a large amount of money, you must consider using promissory notes, specifically secured promissory notes. In this article, we will discuss what a secured promissory note is, and how it differs from the unsecured promissory note.
What Is a Secured Promissory Note?
Broadly, a secured promissory note is referred to as the legally binding agreement between lender and borrower, which can be any individual or business. It contains details about the amount of loan and stipulates specific terms by which the borrower pays back the money loaned.
More importantly, a secured promissory note is backed by collateral as security for the lender. Moreover, this note enables the borrower to borrow money from the lender while receiving a lower interest rate.
Generally, lenders do not know whether they will get repayment of the money they have loaned to the borrower. Therefore, secured promissory notes are used in which the borrower provides the lender with valuable assets or property as collateral.
It allows the lender to claim loan repayment if the borrower defaults on agreed loan repayment. Of note, collateral can be any real estate as well as personal property.
In particular, if real property is offered as collateral, it will encompass either deed of trust or mortgage. However, in the case of personal property, a security agreement will be required.
Differences between a Secured and Unsecured Promissory Note
Usually, both secured and unsecured promissory notes contain similar key elements as required in the promissory note. However, there are a few differences between both types of notes.
More precisely, a secured promissory note offers security and assurances in the form of collateral to protect the lender against the borrower’s default on loan. On the flip side, the unsecured note is not backed by any collateral.
Unlike secured promissory note, unsecured note entails more risk and therefore, they are used when the amount of loan is low and less significant. Moreover, an unsecured loan can be used when the borrower is highly credible with good credit history.
A secured note offers great benefits for borrowers as they can seek for huge loans from a lender. However, an unsecured note attracts a lender who wants to earn high-interest rates on money loaned and short durations for loan repayments.
Furthermore, loans in the secured promissory note are reasonable as compared to an unsecured promissory note. This is because interest rates are lower in a secured note on large loan payments. Also, the time allotted for loan repayment in secured payment is longer than in an unsecured note.
What Information Is Included in a Secured Promissory Note?
The secured promissory note includes the following key information:
- Complete names and address of the lender and borrower
- Amount of loan being borrowed
- The interest rate that is owed to the lender
- Specific terms and conditions of the loan
- Amount of time for loan repayment
- A clause is also included in a secured note stating that the borrower may make loan repayment before the due date.
Furthermore, it is to note that a secured promissory note does not contain information about collateral that is offered by the borrower. In addition, secured promissory notes are signed in combination with a security agreement.
This security agreement stipulates information about collateral (asset or property) being offered by the borrower. It is advised that this security agreement should include information about collateral goods as much as possible.
In brief, lenders and borrowers are advised to use a secured promissory note when lending or borrowing a large amount of money. This is because it offers lenders security in the form of collateral if the borrower fails to make a loan repayment.
If you have decided to use a secured promissory note, you can visit our website CocoSign to find great templates for a secured promissory note. Besides, we also provide templates for different types of promissory notes.
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