What Is an Unsecured Promissory Note?

B. Miller

An unsecured promissory note is a legal document, or bank note, that is signed along with a loan. It states that the borrower is promising to repay the loan to the lender, as specified by the terms detailed in the loan documents and usually repeated briefly in the promissory note itself. Both parties must sign the promissory note, and therefore agree to the terms, in order to make it a legally binding document. The difference between an unsecured and a secured promissory note is that a secured note is guaranteed by a certain asset, such as a home or vehicle, whereas an unsecured note does not have any collateral associated with it.

An unsecured promissory note indicates a borrower's intention to repay a loan to the lender as detailed in the promissory note itself.
An unsecured promissory note indicates a borrower's intention to repay a loan to the lender as detailed in the promissory note itself.

Nearly all different types of loans will have a promissory note attached. Student loans, personal loans, or a variety of other types are some of the most common unsecured loans. These will then have an unsecured note. The only guarantee that the borrower will repay the loaned money, in this case, is the fact that he or she signed the paper and essentially promised to do so. It is much more difficult, then, for a borrower to get an unsecured loan if he or she does not have stellar credit and low existing debts.

This is because the borrower has more limited options for recouping the funds if the lender does not repay as promised in the unsecured promissory note. If a loan is secured by a house or a car, for instance, the lender can foreclose on the house or repossess the car because this is guaranteed debt, but the only option for a borrower who defaults on an unsecured loan or goes bankrupt is to sue, which itself can be a costly endeavor. Nonetheless, the unsecured promissory note does help to ensure that the funds will be repaid because it demonstrates that the borrower knew what he or she was agreeing to in signing the loan.

Most promissory notes are designed fairly similarly. The loan documents themselves will contain all of the fine print and the details of the loan itself, and the unsecured promissory note is designed to be a bit simpler. It will typically just contain the names and contact information of the lender and the borrower, as well as a brief outline of the terms of the loan and the due date of repayment. Still, though, it is necessary to fully read the note and ask any questions before signing anything; having a lawyer look over it would be even better.

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