It is no secret that promissory notes are the oldest form of investing. We know that promissory notes are of two types unsecured and secured promissory notes. In this post, we will discuss a type of promissory note that is an unsecured promissory note.
Whether you are a lender or a borrower, you must understand about unsecured promissory notes. You also need to know what are its advantages and disadvantages before using an unsecured promissory note.
What Is an Unsecured Promissory Note?
An unsecured promissory note refers to a document that enables a lender to detail a sum of money that is given to the borrower. Of note, the lender gives money to a borrower that is to be reimbursed along with interest (if any).
As the name suggests, an unsecured promissory note does not have any security in case debt or borrowed money is not paid by the borrower in full. In other words, an unsecured promissory note does not guarantee any property or asset to the lender.
An unsecured promissory note is, therefore, a simple IOU (I Owe You) as it is not backed by any collateral. The lender considers the borrower a credible entity without any security. The lender does not receive anything in return if the borrower defaults on his/her payment.
Also, there are no prepayment penalties involved in the unsecured promissory note. Moreover, payment in this type of note is structured on either a weekly or monthly basis.
When Do You Need an Unsecured Promissory Note?
An unsecured promissory note can be used for various purposes such as student loans, business loans, vehicle loans, mortgage, or personal loans between friends and family.
Unsecured promissory note templates should be created whenever you want to lend a huge amount of money to another person or business.
If you are starting a business and need a large amount of money to invest in your start-up, you will need an unsecured promissory note. This is an obligation for the borrower to repay the money loaned.
Through this agreement, one party (borrower) agrees to pay a specific amount of money to another party (lender). Moreover, the lender who uses an unsecured promissory note is advised to take into account the credibility of the borrower right before signing the agreement.
Advantages and Disadvantages of Using Unsecured Promissory Note
Unsecured promissory note also encompasses some advantages as well as disadvantages. Whether you are a holder of an unsecured promissory note or a borrower, make sure you are aware of its pros and cons before using this promissory note.
If you are a lender (promissory note holder), you should note the advantages and disadvantages of using unsecured promissory note which are as follow:
Advantages for Lender
- It may provide the lender with a higher interest rate and therefore, good returns in comparison to keeping your money in a bank account.
- You may sell as well as borrow against promissory notes whenever you need money.
Disadvantages for Lender
- Unsecured promissory note involves great risk as compared to other investments. This is because this note is not backed by collateral.
- In case of the borrower’s default to make a loan repayment, the lender will need to file a lawsuit to collect a loan.
- Selling an unsecured promissory note is not an easy task as there are quite a few buyers of this note. Moreover, the buyer requires a huge discount as opposed to a secured promissory note.
If you are a borrower using an unsecured promissory note, make sure you know its pros and cons.
Advantages for Borrower
- You can use this promissory note to borrow money specifically when you lack sufficient credit rating to get a business loan from any lending institution or bank.
- It gives repayment assurance to your lender.
- You can avoid pledging any of your assets or property as collateral.
Disadvantages for Borrower
- You might be required to pay a higher interest rate to your lender as compared to a secured note.
- You might face loan default in case you lack funds to make a loan repayment. Besides, the lender may take you to court to obtain loan payment.
Unsecured promissory notes are relatively simple as opposed to other loan agreements and offer significant advantages to both lender and borrower. However, unsecured promissory note also encompasses disadvantages for both parties.
Before using an unsecured note, make sure you have detailed information about it to avoid future complications in making loan repayment. If you are looking for great unsecured promissory note templates, visit our website CocoSign.
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