What Is A Secured Promissory Note?
In your life, at least once, you will likely need to get some funds by borrowing money from banks or institutional lenders. Mostly, they use the documents whether it is a promissory note or a security agreement. Generally, a promissory note is written as a promise from the borrower to pay the loan, while the security agreement is used when there is collateral to guarantee the loan.
A promissory note is used when a borrower is borrowing some money from someone or institution. The promissory note is divided into two parts; secured and unsecured. The secured promissory note is used when the lender asks collateral such as inventory, account receivable, business equipment, etc to guarantee the money. Without the need to file a lawsuit, the lender has a right to take over the collateral if the borrower fails to repay the debt. Meanwhile, the unsecured promissory note doesn’t use the collateral but the lender can file a lawsuit when there is a dispute in the future.
Secured Promissory Note And Security Agreement Differences
The security agreement is attached to the secured promissory note. This typically includes the security agreement along with a more detail description of the collateral. If the borrower fails to repay the loan, then this will mention the action to take so the lender can seize the collateral.
To help you learn this, you can download real estate promissory note PDF and forms a secured promissory note. It will be easier for you to understand what to include in the document.
Things That Make A Secured Promissory Note Invalid
Before we dig deeper into what makes the promissory note invalid, you need to understand the basic things. Maybe you have learned the term IOU. Remember that this is different from a promissory note. A promissory note should include both parties, the amount of money, interest rate and the timeline for sure. Also, the promissory note is not attached to a business.
Besides, some conditions make your unsecured or secured promissory notes invalid, which are:
- Lose the original document – Losing the original document will cause an invalid document. You have got a problem. Let’s assume your borrower stops paying the money, and then you try to collect the evidence. In the end, you have found out that you lose the original document. If the last evidence you have in your memory, then the agreement becomes invalid.
- Ownership proof – The next thing that causes your agreement to be invalid is the ownership proof. There are many problems regarding mortgage that this is transferred to the second owner, but the second owner confirms they never received it. This will cause an invalid promissory note.
- Flaws in the notes – The promissory notes are indeed said one of the simplest documents in the loan. However, some things could make it void. For example, if one of the parties didn’t sign the agreement. Then the document will be invalid because it cannot be proven in front of the court.