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What is a Secured Promissory Note?

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  • Written By: Jim B.
  • Edited By: Melissa Wiley
  • Last Modified Date: 28 October 2016
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A secured promissory note is the part of a loan contract that specifies the terms of a loan that is secured by a borrower offering collateral to a lender. Such a note often allows the borrower to borrow more money or receive lower interest rates from the lender. Information included in a secured promissory note can include the names of the lender and borrower, the amount of principal to be borrowed, and the interest rate owed to the lender. Most secured notes are signed in conjunction with a security agreement specifying the goods that the borrower will provide as collateral.

Loans are used by many people as a way of securing capital for a major financial commitment like buying a home or pursuing higher education. Such capital is often provided by lenders who ideally receive the amount that they loaned back along with interest payments from the borrower. Lenders often have no way of knowing if they will receive repayment of the premium that they have loaned, however. With a secured promissory note, borrowers offer the lender something valuable that the lender may claim if the borrower defaults on the loan.

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It is important to note that the secured promissory note itself does not actually include the collateral being offered by the borrower. Instead, the note contains pertinent information about the lender and borrower and the terms of the loan. Included among those terms are the principal amount of the loan, the interest rate, and the amount of time that the borrower has to repay the loan. There is usually a clause included as well that states that the borrower may pay back the loan before the required date.

Attached to the secured promissory note is the security agreement, which specifies the collateral that the borrower is offering. This agreement should have information on the collateral goods that is as detailed as possible. For example, if a car is offered as collateral, the make, model, and vehicle identification number should be included.

The main benefit of a secured promissory note to the borrower is that it affords him the opportunity to seek out better terms from the lender. Whereas an unsecured loans usually can only attract lenders who insist on high interest rates and short durations for repayment, loans secured by a promissory note are much more reasonable. Interest rates are usually lower, the amount of principal loaned can be greater, and the amount of time allotted for repayment is generally longer than it would be with an unsecured loan.

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