A Promissory Note, also referred to as an IOU, is a contract documenting a financial promise between two parties. The borrower (the person who received a loan) promises to pay back a sum to the lender, outlining when and how they will return the borrowed amount.
A Promissory Note is often used when the amount is fairly small or the agreement is straightforward.
Terms included in a Promissory Note:
- The principal amount of the note, whether interest will be charged, and when it is due.
- Payment dates, penalties for default, and collateral (if any).
- Contact information for each party and if they are an individual or a corporation.
What is a Payment Default?
A payment default is when a borrower fails to make a payment on time, as per the agreed upon schedule. It is up to the lender to decide what payment defaults will be, and how to implement them. If a borrower misses too many payments, and provided collateral, the lender may (after taking the issue to court) seize the collateral in question in order to make up for some or all of the remaining amount due.
How do I Create a Payment Plan?
How you create your payment plan depends on the amount lent, and when you wish it to be paid in full. Most people choose to allow for monthly payments to be made on a specified day of the month. Make sure that the amount due is affordable for both the borrower and the lender, as payments that are either too high or too low could cause issues for both parties.
When do I Need a Promissory Note?
Promissory Notes, or IOUs, are generally recommended for people who have either borrowed or lent a sum of money. While you may not want to provide an IOU for the price of a coffee, a Promissory Note should be used for anything that will require payments over time or that cannot be paid back right away.
Enforcing a Promissory Note:
To enforce a Promissory Note in the event of a missed payment or loan default, you'll need to:
- Gather all documentation of the loaned amount and the agreement.
- Get in touch with the borrower and request the amount due.
If the borrower does not respond, your next steps would be to:
- Contact a lawyer and request that they provide a letter of collection to the borrower.
- Take legal action against the borrower and enforce the court's decision once it has been made.
- Attempt to collect through a third party, such as a bank or other collection agency.