How to Secure a Promissory Note

Essentially a more formal version of an IOU, a promissory note is a legal document, in which a family member, friend, or business partner puts out a promise, in writing, to pay back the money they have borrowed from you. Promissory notes can be of two types – secured and unsecured. In an unsecured promissory note, the borrower simply promises that s/he will repay you the amount in full in a certain time period. A secured promissory note on the other hand, is a more serious affair, and is usually drafted in cases where a person has borrowed a large sum of money for the purpose of buying a house, or some other item. If you are going to be involved in the process of drafting such a legal document, you need to know how to secure the promissory note.

• Start by educating yourself on how secured promissory notes work. These sort of notes are backed by some sort of collateral that guarantees payment – most commonly property. This means that if the debtor does not pay you back in full, the collateral will be transferred to your possession.
• Since property is the main type of collateral that is used, you will need to decide what sort of property you want to mention in order to secure the promissory note. In this case you can use real estate (plots and houses), tangible property (assets like cars, jewellery, televisions, etc), and intangible property (assets like copyrights, patents, stocks, rights to a business, etc).
• Before you lend the money and the deal is signed, discuss terms and conditions with the borrower, so that everybody is on the same page, and clear about how the entire matter will proceed. Negotiate with the borrower about the amount that you will be lending, and let her/him know exactly what sort of collateral you require to secure the promissory note.
• Once these details have been chalked out, proceed to write out the promissory note, with all the terms and conditions. Make a list of the collateral that will be making the promissory note secure, clarify whether the payments will be in instalments or one lump sum, mention the date when the payment is due, and state all the interest and late fees that apply.
• Finally, make sure you both sign the secured promissory note in front of a notary public, who can witness the signature and then verify the authenticity of the note by stamping it herself/himself. Make photocopies of the notarized agreement – keep one for your own records along with the original, and give the other to the debtor. If the borrower defaults or is unable to pay you back, you can collect the collateral as per the secured promissory note.