When Should You Use a Loan Agreement vs. Promissory Note?

Many people and businesses depend on loans and other credit facilities to achieve their business goals and objectives. While there are several procedures for accessing credit with different terms and conditions, most lenders prefer using either loan agreements or promissory notes. Loan agreements and promissory notes ideally do the same job. However, they have a few differences, which borrowers should consider before choosing either.

What Is a Loan Agreement?

Loan agreements provide official verification of financial agreements between two parties. The primary goal of this document is to confirm the deal between the lender and the borrower and highlight the repayable due date. However, it highlights other details about the transaction. The only difference between this document and a promissory note is its official approach.

Loan agreements have comprehensive details about the agreement. While most people use a loan agreement template to generate their loan agreements, the terms surrounding different transactions may differ. A loan agreement typically has four sections. They include;

● Definitions and interpretations - This section is the dictionary of the loan agreement document, which defines the financial terms and jargon used.
● Financial details - It indicates the amount loaned, total repayable amount, due date, and interest charged on loan.
● Transaction details - This section highlights specific details about the loan transaction. Common items included in this section are the borrowers' personal details and what happens if the borrower fails to refund before the end of the due date.
● The type of loan agreement - This is the last section that contains set standards for the entire document. There are typically two common types of loan agreements. Unsecured loan agreements and secured loan agreements. Secured loan agreements contain information about the borrowers' assets used against the loan.

Unsecured loan agreements are used in loans without any form of security.

Loan agreements should be used for large amounts of money. It is an official and legal document that should be used if there is no personal relationship or trust between the two parties.

What Is a Promissory Note?
A promissory note closely resembles a loan agreement. It is a document with agreeable terms between two parties, where one agrees to lend the other a given amount of money. Unlike a loan agreement, a promissory note is negotiable. This means the amount repayable and duration can change over time. A promissory note should highlight the following;

● The loaned amount
● Maturity data
● Penalty for overdue payments
● Interest rates

The format of the details outlined above varies depending on the lender-borrower agreement. A promissory note is typically used for small loaned amounts or if the borrower has close relationships with the lender. Since the trust relationships between the parties, they would want to keep off legal agreements.

Endnote

When lending money to someone, what you should use depends on the amount borrowed and the relationship or level of trust between the parties. If the sum loaned is small and there is some trust between the parties, a promissory note can be used to avoid legal issues. However, a secured loan agreement should be used for large sums and where unreliable trust exists. Note that these documents can still be used digitally even in the current era where digital lending platforms are on the rise.

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This release was published on openPR.