A promissory note is essentially an investment tool and comes in different kinds. Each kind of promissory note has specific characteristics and one should know the correct application of each. Appropriate tools are needed for planning finances, retirement and even for making usual investments, since each is meant for accomplishing a specific purpose. Here is a brief introduction to some of the most encountered types of promissory notes.
The Common Note
The common or ordinary promissory note is best defined as a written, signed, absolute promise for paying a specified amount of money at a predefined time. It is a promise in writing to pay funds or pay back a loaned amount, or for taking any additional loan. It is most frequently used for all the kinds of loans given by the bank, like auto financing, financing for homes and for financing for appliances and furniture.
The Self- amortizing Real Estate Mortgage Note
This type of note makes it obligatory for the borrower to pay back a borrowed sum in equal payments, comprising of the principal amount and the interest. It may be paid every month, quarter or year. At the maturity of the loan, the borrower is not required to make any lump sum payment. Lenders typically give amortization tables that clearly define the amount of interest plus principal payable for the entire duration of the loan.
The Balloon Note
This is also known as a balloon loan. A balloon note implies a loan with one big principal payment due on its maturity.
Since the principal amount is to be paid in one go at the maturity of loan, the borrower mainly pays interest only, requiring little capital expense during the tenure of the loan.
The Commercial Note
A Commercial promissory note is a loan agreement between a borrower and a lender with some business background. If the borrower fails to repay the loan, the commercial lender can legally implement a lien on the borrower’s assets. Under such circumstances, the lender is not obliged to wait for receiving the dues, and can demand for full amount to be paid immediately.
The Bank Note
A bank note is a promissory note issued by a bank payable to a bearer on demand. Such notes are issued for the circulation of money and not as a loan. Though a bank note is quite like a promissory note, it provides no security for loan money. A bank note is transferred through delivery. The possessor of a bank note is at liberty for immediate payment. Fraud made by a previous holder in getting a bank note will not affect a present holder.
Summary – The Right Tool for the Right Job
There is a large selection of promissory notes, each required for fulfilling specific monetary goals. It is critical to select the appropriate one for your specific need. As a common man is not knowledgeable on this subject, it is best to seek the help of an experienced professional.