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What Is A Promissory Note And A Loan Agreement?

June 17, 2021   Izaak HauptPhilip Evangelou

Both Promissory Note and Loan Agreements are commitments to both lend and borrow money. An individual who is a borrower, would most certainly be hesitant and worried about repayment dates and unrealistic interest rates. On the other hand, a lender worries about receiving the money, as well as timing and the interest rate. It is integral to get your agreement written up so there is a legal document in physical form. A written contract poses the ability to get an agreement from the parties for a good deal, provide clarity and certainty about what actually was agreed on and lastly, implement a legal solution if a party is not compliant with their obligations. When it comes to lending and borrowing money the two prominent types of contracts are loan agreements and promissory notes.

What Is A Promissory Note?

A promissory note is a legally binding contract. It includes the terms allowing one party to borrow money from another.  A promissory note is simple and easily accessible. It only has to be signed by a singular party which is the borrower. It only sets out the obligations of the borrower to repay the lender. The promissory note will specify the amount of money a party borrowed, the interest rate, the repayment date and lastly, any late fees or penalties.

How To Write A Promissory Note?

Like every contract or agreement, it is best to get professional legal advice in order to provide clarity and understand all the correct details. There are not only huge financial risks, but there are big legal risks that can arise if a promissory note is wrong. More specifically, different financial regulations are a determinant that could apply depending on how it’s drafted.

What Is A Loan Agreement?

A loan agreement is also a legal contract that sets out terms for one party borrowing money from another. Ultimately, one of the most significant differences between a loan agreement and a promissory note is that loan agreements are usually far more comprehensive and complex. Loan agreements also place obligations on both the borrower and lender. This is intended to be signed by both parties. 

What’s Security?

There are two main types of loan agreements:

  • A secured loan is a loan in which the borrower has pledged assets as collateral for the actual loan, this then becomes a secured debt owed to the creditor giving the loan.
  • An unsecured loan has no security. When a borrower fails to repay a loan, there is very limited recourse for the lender to recover the lost money.

How To Write A Loan Agreement

A loan agreement is very complex and can be easily misunderstood, this is why it is always very important to seek legal advice and get a lawyer to draft it for you. A loan agreement tends to cover:

  • The amount of the loan
  • Interest rate
  • The date of repayment 
  • Warranties

Key Takeaways

Getting an experienced lawyer to document the complex terms of the loan in a promissory note or loan agreement is beneficial. It can be very hard to know which type is suited best for you, this is why investing in legal advice is crucial. This will not only save you from misunderstandings, but will save you from disputes in the future.

About Izaak Haupt

Izaak HauptIzaac is a paralegal while he completes his Bachelor of Laws, Bachelor of Business at UTS.

About Philip Evangelou

phillipPhil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.