A secured note is also known as a promissory note with collateral. It is an agreement in which the borrower offers collateral, which can be claimed by the lender in the event of nonpayment.
This collateral can take the form of a vehicle, real estate, or other valuable assets. The asset in question should always be equal to or greater than the value of the loan. Any type of collateral does not guarantee unsecured promissory loans. Because those loans are typically riskier , they come with a higher interest rate to protect the lender.
Typical unsecured loans that you may see are student loans and credit cards. To do this, you can find a secured promissory note template which provides the details of the loan, and explicitly lists the asset being put up for collateral. Here are the steps for creating a reliable document which will protect you as a lender:. If you opt for a secured promissory note over an unsecured note, you want to create a security agreement which makes reference to the loan and attach it to your document.
Be sure you provide as many details about the collateral as you can. For example, if a vehicle is being put up as security, including the make, model, color, and Vehicle Identification Number will guarantee that there is no mistake if you need to collect on a defaulted loan. As the lender, you will need to have your borrower sign a security agreement that contains this description and makes reference to the loan. A promissory note secured by real property can provide strong security for the lender, but it does come with a few additional steps.
Once the secured promissory note is signed, have the borrower sign a mortgage agreement that effectively puts a lien on the real estate, guaranteeing that it will be transferred to the lender in the event of default on the loan.
Have this mortgage agreement signed, witnessed, and notarized to make it as enforceable as possible. Lastly, you must file the promissory note and mortgage agreement with the appropriate office based on your state. In some states, you must use a deed of trust in place of a mortgage agreement as security when financing a loan. A promissory note secured by a deed of trust functions in a very similar manner, except that a deed of trust is held by a third party government entity while a mortgage agreement is simply an agreement between the borrower and lender.
Check your state regulations about when to use a deed of trust when creating your secured promissory note. In the event that a borrower defaults on their loan agreement, the lender is entitled to collect the secured collateral that is guaranteed to them. They are free to repossess the secured asset through their own efforts, but it is often more effective to use professional agencies to accomplish this task.
Some parties choose to use a regular Promissory Note to memorialize a loan. However, this document provides extra security by including collateral that the Borrower promises to relinquish to the Lender if they do not repay the loan as described in the Note. This collateral can be either personal property, such as a car or jewelry, or real estate, such as a piece of land. By using a Secured Promissory Note, the Borrower will be able to offer an additional incentive that can convince the Lender to make the loan and the Lender will have additional assurance that the Borrower will pay the loan back by its due date.
Generally, a Secured Promissory Note will be secured using an additional document. If the property being used as collateral is personal property, the Note will be secured using a Security Agreement. If the property being used as collateral is real property, the Note will be secured using a Deed of Trust.
In the event of default, or the Borrower failing to pay back the loan as agreed upon in the Note, the Security Agreement or Deed of Trust allows the Lender to use or sell the collateral to recover the money loaned to the Borrower. The Secured Promissory Note is binding on the Borrower and obliges them to repay the loan to the Lender. A Security Agreement or Deed of Trust is the document that allows the Lender to then take possession of the property that the Borrower is using as collateral in the Secured Promissory Note.
Having a Security Agreement or Deed of Trust is not mandatory to create a binding Secured Promissory Note, but having one of those companion documents does make things much easier for the Lender to take remedial action if things go wrong.
This means that only the Borrower is bound to actions i. In fact, Lenders don't even sign Promissory Notes - only Borrowers do. Often, Secured Promissory Notes are used in place of more formal loan agreements when the loan is being made informally between friends or family members.
Secured Promissory Notes can even sometimes be used between very small businesses. When more formal loans are made between bigger businesses or banks, for example, that is when loan agreements are used. This document includes all of the information necessary to create a thorough and well-written Secured Promissory Note. This Note sets out all of the basic terms and details of the loan , including the names and addresses of the Borrower and Lender, the amount of money being borrowed, how often payments will be made, the amount of the payments, and any applicable interest rates or late fees.
The Note specifies how the money will be repaid and includes several common repayment options:. Finally, the Note includes a description of the property that is being used as collateral and under what circumstances its ownership will transfer to the Lender. Once the Parties have completed the Note, the Borrower should sign and date it.
Both Parties should keep a copy of the note in a safe and secure location for their records and in case of future dispute. At the end, you receive it in Word and PDF formats. You can modify it and reuse it. Back to top.
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