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Is a Promissory Note Legally Binding?

Crafting a Promissory Note

Promissory note forms can be crafted to address any type of lending situation, and as long as they are crafted with the necessary elements to fulfill the legal precedents of a contract, they are a legitimately binding legal instrument. Many promissory notes are crafted to cover simple agreements regarding the loaning of money from one person to another. They can also be used when an individual sells a vehicle to another person in a private transaction.

When money is loaned between individuals, most promissory notes act as a simple promise to pay. They do not have any collateral assigned that can be used to satisfy the note should the borrower default. Legal promissory notes used for the buying and selling of vehicles and other equipment can be secured through repossession of the vehicle or property should the borrower fail to fulfill the terms of the note.

Mortgages as Promissory Notes

Promissory notes can also be used for lending purposes that are more complex and involve larger amounts of property or money. Home mortgages are a form of promissory note and they are very similarly crafted and worded to a standardized simple promissory note.

The main difference is that mortgage notes are written for large amounts of money and are secured by the property that is purchased with that money. The details of the mortgage note are generally more complex due to the involvement of lending institutions as well as government regulations that oversee real estate lending practices. As long as all the necessary elements exist in the mortgage promissory note to mirror common law contract requirements, the note fulfills all the obligations under the law to be legally binding.

When a Borrower Defaults

Whether or not a promissory note is secured with collateral or is unsecured and based solely on the promise to repay, the same principles of legality apply. If the borrower should default on the note and not be able to repay, the lender of a secured note can find relief by legally repossessing the property that was promised as collateral on the note.

If the note is for a monetary loan and is not secured, the lender has the legal authority to seek restitution through the court system and secure a judgment against the borrower. While this does not absolutely guarantee repayment of the promissory note, it does create a legal judgment against the borrower which can then be pursued through collection activity.

The other disadvantage to an unsecured promissory note or promissory letter is that if the borrower should file bankruptcy, creditors with secured interests will be repaid before any creditor with unsecured interests. This creates a possibility where the unsecured lender might not receive any repayment for the breach of agreement.