Okay, let's break down what "security" means when you're talking about a loan and a promissory note.
Think of "security" like insurance for the lender (you, in this case). It's something valuable that the borrower (your acquaintance) pledges to you. If the borrower fails to pay back the loan as agreed in the promissory note, you have the right to take that pledged item (the security or collateral) and sell it to get your money back.
Here’s the difference between a note with security and one without it:
Unsecured Promissory Note
This relies only on the borrower's promise to pay you back. There's no specific asset backing the loan. If your acquaintance defaults (stops making payments), your main option is to take them to court to try and recover the $10,000. This is riskier for you as the lender because if the borrower has no money or assets, even a court judgment might be hard to collect.
Secured Promissory Note
This note is backed by specific property or assets that the borrower owns, called "collateral."
It could be a car, a piece of real estate, valuable jewelry, stocks, or equipment—anything valuable that you both agree on.
How it works:
The promissory note must clearly state that it is secured and specifically describe the collateral. If your acquaintance defaults, you have a legal right to take possession of that specific collateral. You can then sell it to recover the money owed to you. If the sale brings in more than the outstanding debt, the excess usually goes back to the borrower. If it brings in less, the borrower might still owe you the difference.
Benefit to you:
This provides you with more protection and reduces your risk because you have a specific asset you can turn to if the borrower doesn't pay.
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Can you better define the "security" of the loan on a promissory note?
I understand you're looking for clarification on the "security" of a loan on a promissory note. Can you explain if you are referring to collateral or other forms of security?
I have an acquaintance who owes me $10,000. I want to write a legal document that mandates monthly payments until paid in full.
Are you specifically concerned about how the security on the promissory note affects the borrower's obligations or the lender's rights in case of default?
Can you better define "security" in terms of this promissory document?
Hello, welcome to AskALawyer. My name is DJ. I've been a lawyer for over 20 years. To better understand the legal issues in your message, I would like to ask a couple of questions if that's okay with you.
Does your acquaintance own any significant assets (like a vehicle, property, or other valuables) that they might be willing to pledge as collateral for this $10,000 loan?
He has very little in terms of collateral. He rents, just got a job that pays probably close to minimum wage, and has a car that is worth probably $3,000.
Okay, let's break down what "security" means when you're talking about a loan and a promissory note.
Think of "security" like insurance for the lender (you, in this case). It's something valuable that the borrower (your acquaintance) pledges to you. If the borrower fails to pay back the loan as agreed in the promissory note, you have the right to take that pledged item (the security or collateral) and sell it to get your money back.
Here’s the difference between a note with security and one without it:
Unsecured Promissory Note
This relies only on the borrower's promise to pay you back. There's no specific asset backing the loan. If your acquaintance defaults (stops making payments), your main option is to take them to court to try and recover the $10,000. This is riskier for you as the lender because if the borrower has no money or assets, even a court judgment might be hard to collect.
Secured Promissory Note
This note is backed by specific property or assets that the borrower owns, called "collateral."
It could be a car, a piece of real estate, valuable jewelry, stocks, or equipment—anything valuable that you both agree on.
How it works:
The promissory note must clearly state that it is secured and specifically describe the collateral. If your acquaintance defaults, you have a legal right to take possession of that specific collateral. You can then sell it to recover the money owed to you. If the sale brings in more than the outstanding debt, the excess usually goes back to the borrower. If it brings in less, the borrower might still owe you the difference.
Benefit to you:
This provides you with more protection and reduces your risk because you have a specific asset you can turn to if the borrower doesn't pay.
He says he is willing to pay. I mean this document as simply something to bring to small claims court if it is determined necessary, give me peace of mind, and tell him I mean business. I want to have something official. If that makes sense.
Understood. Then it sounds like you will have a promissory note with no security, but it will be signed by both parties in case you need to go to court.
Yes. Will this need to be notarized?
It doesn't need to be notarized, but it's a good idea to notarize it if you can. It will seem like a more serious document to the borrower.
Can you also better define "security"? Is that kind of synonymous with collateral?
It is the same thing as collateral.
A secured promissory note would list the collateral upon which you would have a lien in case of a breach.
