Several occasions in life will require you to borrow money as an individual or a business. Yet, you must use the correct document to outline the terms and conditions of your loan. To achieve this, you will either use loan agreements or promissory notes. Though they may seem similar, there is a difference in how they work.
Therefore, this post outlines when to use these critical legal forms by discussing their differences. Let’s dive in.
Understanding what a Promissory Note is.
A promissory note contains terms agreed upon between two parties where one lends a given amount of money to the other.
It is a negotiable document which means that the money will be repaid over time, or the repayment period can be changed with time depending on the agreement of the involved parties.
In a nutshell, it is a pledge to repay a sum of money to the person you borrow it from. There may be other names like IOU, payment-on-demand, or payment-on arrival, but the model remains the same.
One important thing to note about this document is that it is mainly used in simple loans that are not considered formal. Significant parts of this document include;
Amount of loan issued to the borrower.
Penalties for late payment.
When to Use a Promissory Note
The primary condition for using a promissory note is when the money involved is not significant or huge. Also, it is applicable in cases where the borrower and the lender are close—for example, a family member, friend, or workmate.
Another notable instance to use this document is the flexibility of returning the money. This is when both parties acknowledge that it’s not very formal, and there are high chances that the repayment date is not fixed. This is to mean it can be altered since the promissory note does not involve legal engagements.
With mutual understanding, parties can alter the dates or allow repayment in installments.
What is a Loan Agreement form?
While it may seem to be serving the same purpose as a promissory note, a loan agreement gives an official and legal approach to the loan process.
Though the principle of application to offer agreement between parties involved on when to repay the loan is the same, a notable difference is that a loan agreement is much more detailed than a promissory note.
Majorly, a loan agreement consists of four sections, namely, definitions and interpretation, commercial/financial details, transaction details, and types of loan agreements. While each note may be exceptional in its ways, the rules of these sections are similar.
When to use a loan agreement
Loan agreements are majorly applicable when lending or borrowing vast sums of money. It is recommended chiefly when both parties want to make the transaction official. The advantage of a loan agreement over a promissory note is that you don’t have to worry about getting your money back because it is a legally binding document.
It can be challenging to know the correct document for your loans as per several states laws in US. That is why forms.legal has these templates to help you. You may download a Texas loan agreement template or of an ideal Michigan loan agreement form to validate your loan processes here at this website.