Secured Promissory Note

While most promissory notes are not secured, a secured note is sometimes available for various transactions. A secured note is the part of a loan contract that details what a borrower secures when the borrower offers collateral to the lender.

What are the advantages of this type of promissory note?

Although many notes are not secured, the advantage of a secured promissory note is that the borrower may be able to get more money than with an unsecured note (or may be able to get money with a secured promissory note when this would not be possible with an unsecured note). Oftentimes, lenders will also offer those taking secured notes lower interest rates than with unsecured notes.

What's in a secured note?

The information in a secured note includes the names of the borrower and lender, the amount of principal being borrowed, and the interest-rate on the money being borrowed. There's also often a security agreement that includes what the borrower has specified as collateral.

How can secured promissory notes help you?

A secured note can help you by giving you the money necessary to do something you need to do, like go to college or buy a house. While with an unsecured note, the lender has few options to claim his or her money if you don't pay the money back, the secured note promises the lender something he or she may have that you've put up as collateral in the event you default on the loan.

With the secured note doesn't include

The collateral promised to the lender in the event the note can't be paid back isn't included in the note. Instead, there's information about the borrower, the lender, and the loan terms. Usually, the note also states that the borrower can pay back the loan before the due date.

Other documents

In addition to the secured promissory note, there is the security agreement, which details what the collateral is that the borrower offers the lender in the event the note can't be paid back. This is quite detailed, and will describe the collateral in question very clearly; for example, if there is a car offered, the make, model, year, and vehicle identification number is included in the note.

Why should you get a secured promissory note as opposed to an unsecured promissory note?

In general, if you sign on for a secured note, you're going to get better terms for the money you receive. You may of course be able to get an unsecured note, too, but this is likely going to mean that your money will come from a lender who wants much more interest for his or her money, and who may insist on much more demanding payment terms as well, such as a much shorter repayment term. With a secured note, not only will you generally be able to get lower interest rates, but the length of payment term will likely also be longer. Regardless, however, most promissory notes also include the clause that you can pay back the money before the end of the agreed-upon term without penalty.

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