In consideration of this Note and as inducement to the Lender to extend a loan to the Borrower, the Borrower grants the Lender a security interest in the following goods:. The Borrower warrants that the Collateral shall not be removed from the Premises without prior written consent by the Lender.
The Borrower agrees not to sell, dispose of or transfer the rights to the Collateral to another party without the prior written consent of the Lender. The Borrower shall furnish proof of such an insurance policy to the Lender. Upon default by the Borrower under the terms of the Note and within 3 three days of demand by the Lender, the Borrower shall deliver the Collateral to the Lender, failing which the Lender may enter the Premises and take possession of the Collateral.
The Lender agrees that proceeds from the sale of the Collateral shall first be applied to repayment of monies due under the Note and that any surplus money shall be transferred to the Borrower.
The Lender further agrees that where the proceeds from the sale of the Collateral are not sufficient to repay all monies due under the Note, such shortfall shall be for the Lender's account and the Borrower shall have no further obligations under the Note.
No relaxation, indulgence, waiver, release or concession extended to the Borrower by the Lender and no delay or omission in the enforcement or exercising of the Lender's right under the Note shall affect the rights of the Lender under this security agreement.
If the loan cannot be repaid the collateral is forfeited to the lender. 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. 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. If you choose to, you may file a petition with the courts. Assuming your promissory note and security agreements are in order, you should have no problem getting a judgment in your favor, which will strengthen your legal claim to the property.
As a final option, there are companies that specialize in purchasing defaulted promissory notes. The lender will receive a sum less than the value of the collateral, and the company will then attempt to collect on the debt through their own means.
Promissory notes do not need to be notarized for them to be legally enforceable, as long as both parties have provided their signature on the document. Skip to content A promissory note can be an excellent way for both lenders and borrowers to benefit from a loan. Contents hide.
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