A formal signed credit agreement between a lender and a borrower is known as a promissory note. This document is a legally binding contract that outlines the terms and conditions of a loan, including the amount borrowed, the interest rate, the repayment schedule, and any other provisions or clauses.
Promissory notes are essential for both lenders and borrowers as they provide a clear understanding of the loan agreement and help mitigate the risks associated with lending and borrowing money. For lenders, promissory notes serve as evidence of the borrower`s obligation to repay the loan, and they can be used in court as evidence in case of a default.
For borrowers, promissory notes provide a clear understanding of their repayment obligations, including the amount of each payment, the due date, and any penalties or fees associated with late or missed payments. This information is crucial for borrowers to manage their finances effectively and avoid defaulting on the loan.
Promissory notes can be secured or unsecured, depending on whether the borrower has provided collateral to guarantee the loan. Secured promissory notes are backed by collateral, which can be seized in case of a default. Unsecured promissory notes, on the other hand, are not backed by collateral and are generally riskier for lenders, resulting in higher interest rates for borrowers.
In conclusion, a promissory note is a formal and legally binding document that outlines the terms and conditions of a loan between a lender and a borrower. Whether you are a borrower or a lender, it is essential to understand the contents of a promissory note to ensure that you enter into a loan agreement with clear expectations and a clear understanding of your obligations.