Loan Agreement in Indiana: The Differences between Loan Agreements and Promissory Notes
There’s no denying the fact that the lending process is frustrating, and if you are in a rush, and with no idea of the documents you should sign, you might end up signing an expensive loan that cripples or worsens your financial status. To ensure that you are not a victim of unfair credit lending terms, you should familiarize yourself with the legal instrument used, as well as the terms that would be regarded as favorable. The lenders will, typically, create the agreement as to the basis for negotiation, but you shouldn’t sign off on the terms laid out in the draft document before you go through all the elements of the fine print. You also need to understand the differences between the documents used by lenders. Today, we look at two of the most common documents used to process loans to individuals and companies. These are loan agreements and promissory notes. While these two are important legal instruments, they have some important differences.
A promissory note refers to a legal contract that sets out the terms to be met by the borrower to ensure that the lender gets back all the money they loaned the lender. It’s often easy to use and simple because it is not detailed. A promissory note becomes enforceable once it’s signed by one party – often the borrower. Generally, this legal contract spells out the obligations of the borrower – in this case, the promise to repay the lender. The lender has no obligations with regards to promissory notes.
Some of the things specified in the promissory note include the amount of money loaned to the borrower, the interest rate charged on the loaned amount, the repayment date, as well as the applicable penalties or late fees.
The simplicity around promissory notes often comes from the fact that they are an ideal fit when it comes to handling small sums of money, for example, when you are lending money to family or friends. Having something in writing prevents non-payment issues since verbal agreements cannot be trusted where the money is involved.
The promissory note is also called an IOU, Payment on Arrival, or Payment on Demand. This contractual agreement recognizes two parties – the payer/ borrow and the payee/ lender.
Note that you could use a promissory note to document either a sum payable or owed to you.
A loan agreement is a legally binding agreement that specifies the terms of the contractual agreement between the lender and the borrower. This contractual document is more detailed compared to the promissory note, and you need to spend more time and be aware of the sections of this loan agreement/ contract before you sign off on the terms of the agreement.
While it serves the same purpose as the promissory note, it’s more detailed, and you need to understand the meaning and the functions of all the provisions to the loan agreement for the best deal. The loan agreement in Indiana is also called a business loan agreement, or a loan contract could be secured or unsecured, with the secured agreement enabling the lender to easily recover money from the assets of the borrower in case the borrower is unable to repay the loan. The unsecured loan agreement, on the other hand, provides no security against the borrowed amount should the borrower default on payments. To get started with a loan agreement as a small lender or an individual, you will be happy to know that you can easily download a free Indiana Loan agreement form. Using this free loan agreement form, you will be able to create a loan contract that covers important aspects such as the loan amount, repayment date, the interest rate, measures to be taken in case the borrower defaults the payment, and the security taken on the loan by the lender.
Generally, the loan agreement puts legal obligations on both the lender and the borrower, and that means more legal protection to these parties. In simple words, the loan agreement spells out that the lender will loan the borrower the agreed amount of money and that the borrower will repay it as per the agreed schedule or terms.
One of the main similarities between the loan contracts and the promissory note is the interest rates. The interest rate charged on the loan amount must be within the state limits. In Indiana, the state’s Usury Laws direct that an 8% interest is charged on judgments for loans where there is no agreement and 21% for the consumer loans, as well as all other supervised loans. Lenders found contravening these laws will be charged with Class A Misdemeanor for all supervised lending for all interest charged above the legal limits. Supervised loans are, however, charged an interest above 21%.
Looking at the two legal instruments, it’s clear that whether you use one or the other document, your decision will depend on the circumstances and the loan amount.
To create a loan agreement in Indianapolis, Fort Wayne, Evansville, Bloomington, Carmel, South Bend, or any other city in Indiana, download our free loan agreement form.