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Promissory notes are written promises to repay a debt. Promissory notes can be either secured or unsecured. Unsecured promissory notes are often referred to as signature loans and collateral is not required for unsecured loans. Personal loans typically represent unsecured promissory notes.
A secured promissory note is one that is secured by collateral of some type. Mortgage loans, for example, are secured by the home on which the loan is made. If a borrower defaults on his or her mortgage loan, the loan maker can foreclose on the house, thereby recovering part or all of the debt by taking possession of the item securing the loan.
When making an unsecured loan to an individual, it is important to realize that there is a very real possibility that the loan might not be repaid. If you are loaning more money that you can afford to lose, it is in your best interest to demand a secured promissory note.
|Jennifer Mathes, Ph.D.|