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What is an Installment Note?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 04 December 2016
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Sometimes known as a promissory installment note, an installment note is one form of debt instrument that is very similar to a standard promissory note. A key difference is that the instrument includes provisions for the orderly repayment of the principal amount that is extended to the borrower, along with the settlement of any interest that is applied to the outstanding balance in compliance with the note’s terms. Essentially, this arrangement establishes at least a minimum amount that must be paid at specific times during the life of the note, creating an installment schedule for the repayment of the debt.

The contents of a typical installment note also address other issues associated with the loan transaction. In some nations, lending regulations may require that the note contain information regarding the intended purpose that the borrower has in mind for the funds, such as using the money to purchase a home or fund some specific project. It is not unusual for details on how interest is applied to the balance to also be included. The provisions will identify whether the note carries a fixed or floating rate of interest, how that interest rate is applied, and what options the borrower may have for converting from a fixed to a variable rate at some point during the life of the debt.

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When the installment note is utilized for the purchase of real estate, there is a good chance that the text of the document will address the options open to the lender in the event that the borrower defaults on the loan. Depending on the outstanding balance at the time the default occurs, the lender may be able to seek redress through the court system, or file action to secure title to the property purchased with the proceeds from the note. Even when the loan was not connected to the purchase of property, it is often possible to file a claim in a small claims court to recover at least a portion of the outstanding balance due.

The installment note is often seen as an alternative to obtaining bank financing, and may serve as the lending agreement between two individuals, such as between a friend who lends another friend money for use as a down payment on a home. Preparing a legal document like an installment note helps to protect the personal lender from losses by establishing some rights in terms of the ability to require repayment of the loan. At the same time, the structure of the installment note can also sometimes protect the interests of the borrower, especially if the terms preclude the ability to call the entire balance due as long as the borrower is making payments according to the installment schedule.

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