Updated November 19, 2020:

If you need to cancel promissory note, this process involves voiding a document in which one party promises to pay another party a set amount of money.

About Promissory Notes

Promissory notes are promises made between at least two parties in which one party promises to pay money to another. This document is a legally binding contract. Both the lender and the borrower will sign the promissory note to execute it. As a result, the person borrowing the money is legally required to pay the loan amount back to the lender.

Some of the information on a note includes:

  • Due dates
  • Total amount due
  • Purpose of the note

When a lender and a borrow make an agreement for the exchange of money as a loan, they will both sign a promissory note. Before a lender will loan money to another person or company, they need assurance that the borrower will repay the money. This vital legal instrument will include the terms and stipulations of the loan, including the monthly repayment amount and schedule, along with any applicable interest rate.

A lender may also require some type of collateral, such as property, to secure the note and ensure that the borrower will repay the loan. If collateral terms apply, these terms should be outlined in the promissory note. A promissory note is most commonly used in a situation that falls outside of normal lending practices. For example, a bank or other financial institution wouldn't use a promissory note because it would have strict criteria, methods, and policies in place around lending.

Some of the people who might use promissory notes include individual lenders, investors, and financial lenders. This type of note is useful if the borrower's credit history or financial situation doesn't meet the requirements to borrow money from a bank or other traditional lending source. In this case, the borrower's only option might be to use an individual investment to receive funding. In order to raise capital for a business venture, the owner might need to sign a promissory note in exchange for funding.

Some lenders report promissory notes and the history of repayment to the main credit reporting agencies, which would impact the borrower's credit rating. Failure to repay the loan based on the terms outlined in the promissory note can result in the lender taking legal action against the borrower. If the loan is repaid in full, the next step for the lender is marking that the promissory note has been paid in full.

Before a promissory note can be canceled, the lender must agree to the terms of canceling it. A well-drafted and detailed promissory note can help the parties involved avoid future disputes, misunderstandings, and confusion. When canceling the promissory note, the process is referred to as a release of the note. Using the release effectively can also reduce the chance of legal disputes. Although no document can truly prevent claims or lawsuits, having a written release of the promissory note is helpful in strengthening the defense if a legal issue does arise.

Each party must thoroughly evaluate the other's performance to understand how to go about releasing the promissory note. A promissory note helps to protect the lender through the process of lending money to another. In a similar way, the release of the note will protect the person borrowing the money. Investors might also choose to purchase promissory notes from other lenders and collect the funds being repaid.

Benefits of a Promissory Note

One of the benefits of a promissory note is that it allows smaller business owners and individuals to secure a loan in situations where they might not otherwise qualify through traditional lending avenues. Investors can also take advantage of potentially higher returns because of the increased risk. If an individual or business needs capital, a promissory note allows for the opportunity to get the resources needed from unconventional sources, allowing them to move forward with the business venture.

Dos & Don'ts Checklist on Promissory Note

Before providing a promissory note and lending funds, any property used as collateral should not have any liens in effect. Each party should have enough time to review the loan agreement and promissory note, as well as the release of the note. By providing sufficient time for review, the odds are lower of a dispute arising due to a claim that the terms were not understood.

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