A secured promissory note is a contract used for ensuring a borrower pays a loaned sum of money back (plus interest) to the person or entity that lent it. Being “secured”, the borrower must provide one (1) or more asset(s) to serve as collateral. Should the borrower leave the debt unpaid, the lender can take possession of the asset(s) and sell them to pay off the debt. The alternative to this note is the unsecured promissory note, a lending document that removes the requirement for security.
Owing to the increased protection the secured note offers lenders, they often come with lower interest rates and allow for greater lending limits.
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
The types of assets the borrower can use as collateral are wide-ranging. So long the lender can sell the asset to cover all (or a portion of) the lent balance, it will most likely be accepted. Common items used as collateral include:
- Motor vehicles;
- Real estate;
- Savings accounts;
- Investment accounts;
- Jewelry; and
- Art / collectibles.
While secured and unsecured notes have more in common than not, it’s important to understand their differences:
|Factor||Secured Note||Unsecured Note|
|Collateral||Requires the borrower to set aside one (1) or more assets that the lender can legally acquire should the loan go unpaid.||Does not require the borrower to provide collateral.|
|Interest rates||ower rates compared to unsecured notes due to the asset(s) placed as collateral.||Standard interest rates|
|Credit score||While an applicant’s credit score is an essential tool for those that lend money, lenders are more likely to lend to a person with a less-than-favorable score due to the added security the collateral provides.||A major influence as to whether or not the borrower will be approved for a loan due.|
Arguably one of the most important sections, this is where the lender specifies the due date of the note and the payment plan the borrower will follow. They have the option of having the borrower make a single lump-sum payment or paying in weekly, monthly, or quarterly increments.
2. Late Fee
A late fee is a penalty that the borrower must pay to the lender if they are late on payment. The lender can forego the requirement of a late fee by leaving the section blank. Additionally, if the borrower has a good reason for being late on payment, the lender can decide to waive the fee (for that single instance) if they wish.
This section is what makes the note a “secured” note. The lender will need to write the asset(s) the borrower will be providing as collateral towards the loan. It’s best to be as descriptive as possible when listing the asset(s). For example, instead of writing “Motor vehicle”, write “2015 Ford F-150 XLT, White, 122,650 miles, VIN: …”.
A co-signer is a person that agrees to take on responsibility for the full outstanding balance of the note if the borrower stops making payments. While having a co-signer is optional, it reduces the lender’s risk substantially and can lead to having a lower interest rate on the note.
5. Interest Due in the Event of Default
In the event the borrower doesn’t pay off the note by the due date (defaults), this section confirms that the unpaid balance will accrue interest at the same rate as before.
6. Allocation of Payments
Affirms what payments made by the borrower will apply to first (1. late fees –> 2. interest –> 3. principal).
Gives the borrower permission to pay the note in-full without penalty. This section can be altered by the lender if they want to the borrower to be required to pay an additional fee should they pay the loan off before the due date.
If the borrower defaults on the note, this section provides the lender with the right to require all outstanding loan balance (and the security as stated in Section 3) due immediately.
9. Attorney’s Fees and Costs
This section states the borrower will be required to pay the lender’s attorney’s fees (and other legal fees) if they default on the note. Additionally, it says if either the lender or borrower sues the other (and wins) the losing (“non-prevailing”) party will be required to cover the costs.
10. Waiver of Presentments
Wavies the borrower’s right to receive notice to the items described in the condition.
Establishes that even if the lender does not use a right as stated in the note, it doesn’t mean they can’t use it at another time later on. For example, if the lender lets the borrower make a payment a few days late without issuing them a late fee, it doesn’t mean they can’t issue a late fee if the borrower is late on a payment again.
If, for any reason, a section (or part of a section) of the note becomes unusable or no longer “makes sense”, it doesn’t affect the validity of all of the other sections within the contract.
As the section states, the note cannot be affected or modified by any outside documents, and if the parties wish to make changes to the note, they must both agree about the proposed changes.
14. Conflicting Terms
Ensures that the main promissory note itself supersedes any other terms (even if they are similar or identical) in any other agreement relating to the promissory note.
States the four (4) methods in which the borrower can send a notice to the lender.
A “surety” is a person that takes on the responsibility of the loan if the borrower can’t (or chooses not to) repay the loan. In essence, the “Execution” section decrees that the responsibility of paying the loan is on the borrower, not the co-signer (if any).
17. Governing Law
This section establishes the state the lender is based in. Due to each state having its own usury laws, it’s important the lender abides by this state’s statutes when setting the terms of the contract.
18. Additional Terms & Conditions
An optional area the lender can use to add additional clauses and/or notes to the agreement. This can also be used for writing the reference numbers of any supplemental documents attached.
19. Signature Area
Provides space for the lender, borrower, co-signer (if any), and witnesses (if any) to sign the note. At a minimum, the lender and borrower will need to both print and sign their names, as well as input the date they signed their names onto the form. Signing can be done through eSign or by having each signer manually write their signature.