When an individual or business borrows money from another individual or entity, a promissory note is always utilized to ensure repayment of the loan amount. It is a vital legal instrument used by the lender to detail all the necessary stipulations regarding the amount of money loaned, the interest to be charged, the amount of the monthly payments and the repayment schedule. This information helps to protect the lender and makes the borrower legally obligated to repay the note.
The lender might also secure the note with property or some other type of collateral to ensure repayment, and this is also detailed in the promissory note. The lender may also report the legal promissory note or promissory letter and the repayment history to the credit bureaus which will affect the credit history of the borrower.
Promissory notes are instruments of credit that fall outside the realm of normal lending practices in most instances. Banks and financial institutions usually have set policies, methods and criteria for lending money to businesses or individuals.
Promissory notes, generally, are utilized outside of these normal avenues by investors, financial lenders or even individual lenders where the borrower's situation or credit background might not meet the required criteria of conventional lending sources. In this scenario, individual investment might be the only method the borrower can utilize to gather funding. Therefore, the promissory note is a vital tool used to raise capital.
While the legal promissory note or promissory letter protects the lender by securing payment from the borrower either through collateral or legal recourse, once the promissory note terms have been met and the note paid, it is equally important for the borrower to secure a release of the promissory note.
Just as the promissory note protects the lender through the lending process, once that note has been satisfied, the release of the promissory note acts to protect the borrower. The release protects against any future legal issues that may arise due to the repayment of the debt by acting as a legal written document ending the obligation under the note.
Many times, promissory notes are reflected on an individual's credit report and can have both a positive or negative effect on the individual’s credit worthiness. Promissory notes can also be utilized by investors who purchase the notes and then collect the proceeds.
When this happens, the new investors usually will protect themselves by reporting the note to the credit bureaus, which has definite implications against a borrower’s credit history. Once the note has been satisfied, the release of the promissory note is reported to the credit agencies and the note is then considered paid as agreed.
A promissory note form is the only means some individuals and businesses might have to secure funding during a time when credit is more difficult to find or only available to those with very high credit ratings. It remains a valuable option for investors because they can enjoy slightly higher returns on their investment because of the risk involved. Those in need of capital can acquire the resources they need through these unconventional financial sources and have the ability to move forward with their enterprise.
Both parties can enjoy mutual benefits from this arrangement, but just as important to the process is the release of a legal promissory note, which ensures the financial playing field remains level amongst the lenders as well as the borrowers.
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