The Types of New Jersey Promissory Notes You Should Know

Borrowing and lending money among family and friends is based on trust. The idea is excellent for small loans that wouldn't significantly impact your taxes. However, in cases of big loans, you should consider going the legal way to avoid confusion and anything that could strain your relationships.

You may not necessarily have to prepare a contract, but a promissory note goes a long way. Read on to understand the elements of a New Jersey Promissory Note.

What is a New Jersey Promissory Note?

A promissory note is a binding financial instrument between borrowers and lenders. The document binds the borrower to repay their loan at a specified date and follow the specified mode of payment.

Promissory notes can be issued by banks, mortgage lenders and individuals for personal loans. The agreement protects the borrower against fraud and helps the lender mitigate risks.

Secured VS Unsecured Promissory Notes

There are two types of New Jersey promissory notes, secured and unsecured.

In a secured note, the lender expects the borrower to submit a valuable item to secure the loan. This could be a car, real estate property or a service. The collateral value should be equal to or higher than the loan amount.

The main advantage of a secured promissory note is that if the borrower defaults on payments, the creditor only needs to file a lawsuit to foreclose the collateral. This gives the borrower assurance of getting paid. Secured notes are mainly used on large loan amounts from commercial lenders. If the borrower defaults on their loan, the lender can foreclose the property or sell it to cover the loan amount.

On the other hand, an unsecured promissory note has no protection. This document is primarily used in financial loans or when the borrower has a high credit score. The lender must have complete trust in the borrower to repay their loan and fulfill all the loan terms. But it is still an excellent idea to issue a promissory note for tax purposes, making it easier to file a claim if the borrower fails to meet the promises outlined.

Convertible Promissory Notes

Secured and unsecured are not the only types of promissory notes. For loans made to entities, convertible notes are the most feasible choice to guarantee payment.

As the name suggests, a convertible promissory note can be converted into ownership interest. For instance, the promissory note can be converted into membership in a limited liability company or stock shares in a corporation.

The convertible promissory note should outline the terms and conditions for conversion. A convertible promissory note can be secured or unsecured depending on the borrower's credit score.

New Jersey Promissory Note Repayment Plans

Among the critical elements of a promissory note is a repayment plan. The lender should outline how they expect the borrower to pay the debt and the frequency. There are four main types of repayment plans which include:

Due on Demand

This plan is also known as an open-ended loan. Ideally, it expects the debtor to repay its loan when the lender asks. This kind of plan is commonly used in informal promissory notes, such as when lending money to friends or family.

Lump-Sum

A lump-sum payment plan is where the borrower is expected to repay both interests and principal all at once. The plan is commonly used in small loans that borrowers can afford without making monthly payments.

Installment

With installments, the borrower makes payments in bits until they clear the loan. This payment plan is common with large loans such as car loans, where the lender expects the borrower to make monthly payments in equal amounts, including interests.

Are you looking for a perfect way to customize your promissory note? Download a free New Jersey promissory note template, so you don't have to go through a lawyer to help you draft the document.