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What is a Collateral Note?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 21 August 2016
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    Conjecture Corporation
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Collateral notes are simply promissory notes that commit specific resources to the repayment of an outstanding loan amount. During the period of time in which the note is in force, the recipient of the loan may not sell or otherwise make use of the assets without the express permission of the lender. At the point when the collateral note is considered to be settled in full, the lender relinquishes any and all claims to the property, and the borrower is free to manage the resources as he or she sees fit.

The use of a collateral note is a common financial transaction. Essentially, the lender and borrower agree on what holdings in the possession of the borrower are considered to be acceptable collateral for the amount of funds that are under consideration. The actual note will detail the exact nature of the resources that are used as collateral for the transaction, including estimates of the dollar value of each asset included in the agreement.

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For the duration of the loan that is secured with the collateral note, the borrower may not sell or alter the items listed as collateral without consulting the lender first. Assuming that the borrower wishes to sell one of the assets as a means of reducing the current amount of debt owed to the lender, it may be possible to obtain permission to sell the asset. In other cases, the lender may be willing to amend the collateral note and allow the substitution of a different asset that is considered to be of similar value. This helps to keep the pledge of specific assets intact for the duration of the loan period.

At the point in time when the loan is repaid in full, the lender will often execute a document that affirms the settling of the collateral note and specifically relinquishes all claim to the assets that are identified within the text of the note. The lender retains a copy of this document, with the original copy supplied to the borrower. At this point, the terms of the collateral note are considered to be fulfilled, and both parties may move on to other financial transactions.

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