Secured Promissory Note Template

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A secured promissory note is a document that allows a lender to lend money with the added insurance of having assets property to be handed over to them in the chance the borrower defaults. This type of note carries less risk to the lender and usually allows the borrower to pay a lesser interest rate.

Unsecured Promissory Note – Offers no guarantee for the Lender to recoup the loaned money.

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What is a Secured Promissory Note?

A secured promissory note is a legally-binding agreement between a lender (Promisee) and a borrower (Promisor). A secured promissory note often comes with the loan and stipulates the terms and conditions in which the borrower is expected to pay back the loan. As an extra assurance to the lender, the “secured” promissory note will include some form of collateral. This is in case the borrower defaults on the loan. The collateral will ensure that the lender receives the value of their investment back in full as agreed upon by both parties.

If you are thinking of borrowing or lending a significant amount of money, you may want to consider using a secured promissory note. It’s a great financial document that comes with loans, and it helps to mitigate risks between both parties. However, a secured promissory note is not to be taken lightly. As the borrower, you’ll want to be absolutely sure that you can pay off the loan before signing a secured promissory note.

How to Make a Secured Promissory Note

First, you need to decide if a Secured Promissory Note is the correct document required for your needs. In general, a secured promissory note is less powerful than a loan agreement and more powerful than an IOU. Use the following table below to see whether or not a secured promissory note is needed for your situation.

  • Selling an item to a buyer that does not have the full funds to purchase the item.
  • Buyer poses a risk to paying back the full amount of the purchase price of an item.
  • Need instructions to pay or payback money and consequences if amount goes unpaid.
  • Do not require repayment installments (if needed, it is recommended to use a Loan Agreement). However, our promissory note is compatible to allow repayment installments.

Step 1 – What is being “Secured”?

Since most promissory notes are unsecured, there should be good reason to want it secured. Reason being; a promissory note is more casual in nature whereas a loan agreement is used more frequently when coming to terms upon a secured note. A good example for the use of a secured promissory note would be for a hefty principal amount to a potentially risky borrower that owns a luxury piano. The piano in this case, not prone to damage, retains its value and it can be used as the security instrument. If the buyer defaults on the principal, the lender can recoup their losses by claiming the piano.

There’s no use to having a promissory note being secure if there isn’t something of equal value to the loan principal. Therefore, it’s important to have a security instrument from the borrower that backs the principal amount loaned.

Step 2 – Set Out the Terms

What makes a secured promissory note successful are the terms set out in the agreement. Below highlights all the terms set out in a promissory note. All terms should be addressed before signing the promissory note.

  • Payments – Details how the principal will be paid back.
    • Installments or No-Installments (No-Installments recommended)
    • Interest Only payments (monthly or weekly)
    • Payment upon Due Date
  • Interest Due in the Event of Default – If the borrower fails to make payment when due, the lender has the option to incur an interest rate not more than defined in the State’s Usury Laws.
  • Late Fees – Lender can incur a late fee if the borrower fails to make payment on time.
  • Acceleration – In the event the borrower defaults on the loan, the lender can demand the total amount to be paid in full. Because this is a secure promissory note, it also gives the lender the option to claim the security instrument immediately.

Step 3 – Execute

When executing a secured promissory note, it’s important to entail as many details about the security instrument that is being attached. For example, if a valuable piano is being used as the security instrument, include as many details about the object including the brand name, serial number and all other identifiable information.

Lenders should also consider filing a UCC Financing Statement which makes public that they have an interest in the property being used as security in the promissory note.

Secured Promissory Note VS. Unsecured Promissory Note?

Both types often include the same key elements necessary for a promissory note. However, the unsecured promissory note doesn’t offer the same assurances and securities for the lender against defaults on the loan. In other words, the unsecured promissory note doesn’t include any form of collateral.

Unsecured promissory notes have a lot more risk associated with them. Because of that, they are often used in cases where the amount of the loan is less significant, the borrower is a high-worth client with a lot of good credit, or among parties that are quite familiar with each other (i.e., friends and family).

If the loan does go into default, the lender can still file a demand for repayment, collect what’s due through a debt collection service, or settle the repayment through a small claims court. However, these processes for repayment often don’t come without their own costs. Most lenders would prefer to avoid losing more money just to make back a part of their investment (which the borrower may be completely unable to pay back).

How To Write

1 – Obtain The Displayed Document To Issue A Promissory Note To A Lender

You can save the paperwork previewed in the image by selecting any of the buttons underneath it. This will give you access to the template as a pdf or word processing file. Ideally, you will have the software to input information on screen otherwise, you can use your browser to print the pdf version.

2 – Specific Information Must Be Presented Where Requested

The first statement of this paperwork will require that you provide several items of information to supplement the language used. First, begin by entering the effective date of this paperwork across the first three empty lines. Next, present the full name of the entity who will be taking a loan on blank space labeled “Name Of Borrower.” The following requested item is the building number, street name, suite number, city, state, and zip code of the Borrower’s address. Furnish this information to the space labeled “Address Of Borrower” The full name of the Lender should also be reported in this statement. The blank space preceding the bracketed label “Name Of Lender” has been reserved for the name of the individual or entity that will be giving the Borrower a predetermined sum of money with the expectation of he or she is paying it back. The Lender’s address should be supplied on the next blank space in this statement. Now use the space between the words “…The Principal Sum Of” and the word “Dollars” to present the full dollar amount that will be borrowed from the Lender. This amount should be written out in this area then recorded numerically in the parentheses that follow. In addition to the full loan amount, the yearly interest rate that must be paid should be submitted on the blank spaces before and after the word “Percent.” Make sure to write out this value on the first of these lines then report it numerically in the parentheses area.

3 – Report The Determined Payments And Due Date

The manner in which this loan is paid will be discussed in the first item “1. Payments.” One of the first three statements in this area must be selected to define the types of installment payments being made, if any at all. To select and apply one of these statements, mark the checkbox attached to it then, if requested, supply any information required. If either of the last two options are selected, you will need to continue providing some supporting information.

If the Borrower will not be making payments during the loan period and will pay the full amount of the loan plus the interest owed on the due date, then mark the checkbox labeled “No Installments.” Mark the second checkbox (labeled “Installments”) if the Borrower will be making regular payments to satisfy this loan as well as the interest owed. If so, you must also report how much each payment will consist of using the blank lines provided. The next option will define making “Interest Only Payments.” This means that each payment made will be applied only to the interest earned on the loan amount. Naturally, if the Borrower will be making installment payments toward the loan, some information regarding these payments should be documented. Begin this process by indicating how often such payments will be made. If the Borrower intends on making a monthly payment until the end of this term, then mark the box next to the words “…Day Of Every Month Beginning On.” This will require that you enter the two-digit calendar day of each month when the Borrower’s payment must be received by the Lender on the first blank space as well as the calendar date when the first payment will be made using the next three blank spaces. If a weekly payment plan will be expected then, mark the second checkbox in this area. Additionally, produce the first calendar date when the first loan payment must be received using the three empty lines in this area.  Record the two-digit calendar day, the month, and the year that the full balance of this note along with the total interest amount must be paid to the Lender using the blank spaces in the section labeled “2. Due Date.”

4 – Define The Consequences Of Being In Default Or Late With Payments

The third item, “3. Interest Due In The Event Of Default,” will relay some information regarding when the Borrower’s loan payments will be considered in default but will require the per annum interest amount that will be assessed as a penalty for such missed payments on the blank spaces that follow.  The next two items have been supplied to disclose payments regarding the “Allocation Of Payments” and “Prepayment.” The Lender and Borrower should both take the time to read these articles.  If “Late Fees” will be imposed on the Borrower should he or she not submit a payment in a timely fashion, then we must report some information in the sixth article. Produce the number of days after a missed due date that will be considered a late payment by the Borrower on the first blank line. The second blank space in this section requires the dollar amount that will be charged to the Borrower should he or she neglect a payment on the due date and the number of days you reported above have elapsed. Make sure that both parties read article “7. DUe On Sale,” then refer to the eighth item, “8. Acceleration,” which will safeguard the Lender’s interests. Here, we will discuss the scenario where the Borrower continues to neglect a payment even after a notice. Use the empty line after the words “…Not Cured Within” to solidify the number of days after the Borrower receives a notice of default that must elapse before the Lender can demand all full payment of the debt and interest immediately. 

5 – A Proper Execution Is Required Of The Borrower And Lender

One you have prepared this paperwork with the information it requests in the appropriate areas, you can present it to the signature parties. Each of the parties listed in the introduction must sign this document. If either or both are business entities then that entity must elect a Signature Representative who can sign this contract on its behalf. This note will not be considered complete until both parties have provided a binding signature.

First, furnish the official date of the party signatures to this document using the three empty lines in the “Signature Area” statement to do so.  The party acting as the Lender and intends to make a loan to the Borrower must provide a signature and printed name on the blank lines labeled “Lender’s Signature” and “Lender’s Printed Name” (respectively).

The Borrower must sign his or her name to the blank space labeled “Borrower’s Signature” then print his or her name on the “Borrower’s Printed Name” line. This action must be performed on the calendar date you listed above.