Today, many lenders use promissory notes as a legal document showing the borrower’s promise to repay a loan. Your banking law attorney can help with drafting and reviewing promissory notes.
Promissory notes are commonly used for many different types of loans, including:
- Auto loans
- Business loans
- Student loans
Because promissory notes are legally binding, many financial institutions choose to have their business attorney draft and review these documents. Using clear, concise language and understanding the legal ramifications around promissory notes is important for mitigating risks.
Promissory Note Drafting from Your Banking Law Attorney
Laying out the specifics of an agreement between your institution and the borrower can help reduce the risk of disagreements and disputes. Therefore, having a one-size-fits-all template may not be the best choice for your institution. Your banking law attorney helps draft promissory notes tailored to unique lending situations.
While all promissory notes are different, they generally contain at least the following:
- Lender and borrower names
- Date of agreement
- Principal loan amount
- Applicable interest rates
- Date of maturity
In Texas, promissory notes typically also include full addresses for both parties as well as a detailed description of any applicable collateral.
However, your banking law attorney can also draft promissory notes to include additional information. For example, you might include information on how the borrower will repay the loan, such as through monthly installments or in one lump sum. Many financial institutions also include clear prepayment penalties on promissory notes to help reduce the risk of losing out on potential interest.
One important part of promissory note drafting is including information about whether it is secured or unsecured. Secured promissory notes are backed by some sort of collateral. For instance, auto loan promissory notes are often secured by the vehicle. Unsecured promissory notes generally require a small claims lawsuit to recuperate the funds in the case of default. Because these clauses and details may determine your later options for a defaulted loan, it’s common to have your business attorney draft and review this information carefully.
The Difference Between Promissory Notes and Loan Contracts
One of the main differences between promissory notes and loan contracts is that promissory notes tend to be less detailed. For example, in a loan contract, your banking law attorney will likely need to include specific terms for recourse. This is usually optional for a promissory note.
Also, promissory notes are generally more negotiable than loan contracts. For instance, if both parties agree to change the repayment date. Often you can change these terms with an amendment to the note. Loan contracts tend to be more rigid and less negotiable.
There are some cases where a loan contract may make more sense for the situation than a promissory note. Many financial institutions tend to favor loan contracts for large sums and promissory notes for smaller sums. However, much of this comes down to the unique circumstances. Your banking law attorney offers counsel on when to use promissory notes and loan contracts.
At G. Ortega Law, we provide legal services to financial institutions and middle market companies. We offer legal support for a wide range of situations as well as outsourced general counsel services for small businesses who don’t need full-time in-house counsel.