When you borrow an amount of money and pledge to pay it back then you have created an oral and binding legal obligation. In most cases it is formalized in writing spelling out in detail the terms of payment. Such a legal document is generally known and referred to as a “Promissory Note” and is the subject of this article.
A promissory note is NOT the same as say a personal and informal IOU. An informal IOU acknowledges that a debt does exist, but specific repayment details usually are not included. Banks and financial lending institutions oftentimes require the borrower(s) to carefully read and duly date and sign a detailed promissory note prior to a loan even being processed. The borrower(s) are also instructed to hold onto the note until the loan amount becomes due and payable. This is because it contains essential information relating to the interest rates together with the amount of the principal which has to be repaid.
The formalization of a properly worded and duly dated and signed promissory note is in most cases sufficient enough to stand-up in any litigation brought against a borrower. However, the law does permit a few exceptions as a rule.
If a borrower can prove that he or she signed the Promissory Note while under extreme duress (in other words while under undue pressure from the lender) then a court appointed judge can rule the note legally unenforceable. The borrower(s) should carefully read and ONLY sign a completed promissory note, not simply place his or her signature at the bottom of a blank document.
Side point: A promissory note should not spell out conditions which would be construed as fraudulent and illegal in another county or state. Such as an extremely high rate of interest or strict penalties not mentioned or detailed in the document itself.
The law requires certain legal requirements in the preparation of a promissory note. For example: The lack of ambiguity and competency to execute the Promissory Note are all required by law.
Here are the main points of consideration:
1. Correct identification of all Parties.
2. The exact amount owed and the rate of interest.
3. Date and schedule of payments.
4. The right to legally transfer the note and obligation to another party.
5. The place the Promissory Note is entered into and is to be enforced.
6. The actual Signature Line.
STATE USURY LAW AND THE DEBTOR
Usury is illegal in some states. It is usually defined as charging too higher rate of interest for a particular type of financial loan. But certain institutions are legally exempt from the usury laws (that is why credit cards are so costly) plus real estate brokers can engage in financial loans which involve real estate, and oddly enough be legally exempt. However, the majority of citizens are subject to usury law, and penalties do apply for violating those laws. This can include loss of ALL interest to be charged. Generally though, an individual will only lose the interest to be charged and not the principal amount.
In the state of California for example, the figure of 10% is considered the normal limit on legal interest. This of course is subject to various exceptions as mentioned above. Should you decide to charge more than 10% and/or if you are being charged more than 10% interest, you should immediately seek professional legal counsel and advice.
It can be charged as a felony crime to deliberately engage in usurious interest transactions.
If you are considering an “oral” Note, it would also be wise to consult an attorney. But if you are thinking about using a written promissory note… BE SURE IT IS DULY DATED AND SIGNED BY THE DEBTOR.
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