Understanding how finances work can help you make the most of your money and choose the best financing option. If you are exploring your loan options, you may ask, “What is an unsecured note?” Learn about this type of loan and if it is the right choice for you.
What You Should Know About Unsecured Notes
An unsecured note is a loan option that does not have collateral attached. Lenders typically use this debt instrument as a corporate debt obligation. Borrowers also refer to an unsecured note as an unsecured promissory note or an unsecured corporate debt.
An unsecured note is a detailed legal document that serves as a contract between a borrower and a lender. Unsecured notes are typically used in business, but many people use them to lend large amounts of money. The repayment length of an unsecured note varies, but it can last three to ten years in the corporate world.
An unsecured promissory note is financially risky for the lender because there is no asset to guarantee repayment. The offset the financial risk, unsecured notes typically have a high-interest rate. If a borrower defaults on an unsecured note, the lender can file a lawsuit to collect the unsecured debt.
Are Unsecured Notes Different from Debentures?
An unsecured note is similar to a debenture, but they are two different types of unsecured corporate debt. A debenture is an unsecured fixed-rate loan used by governments and corporations to finance long-term projects, such as road construction.
Investors receive a sizable interest income at regular intervals to compensate for the financial risk. A debenture is a long-term unsecured loan that typically exceeds ten years. The money borrowed can be repaid in monthly installments or in one lump sum on the maturity date.
Unsecured Promissory Note Repayment Options
There are different types of unsecured notes. The best promissory note option for you depends on the repayment length you prefer and how you want to repay the loan.
An installment payment plan is repaid monthly. Both unsecured notes and secured notes use this payment plan. On a specific day of the month, the borrower makes a payment that consists of the principal amount and interest fees. The unsecured note is split into equal scheduled payments over a specified period. Installment payments are typically used for high loan amounts.
Lump Sum Payment
A lump sum payment plan is repaid in full on the maturity date. Borrowers do not have to worry about making payments every month. Lump sum payments are typically used for short-term unsecured promissory notes when a borrower does not borrow substantial money.
A balloon payment plan is a hybrid option that combines installment and lump sum payments. A borrower makes periodic payments that consist of the principal amount and interest fees or just interest fees. The last payment is a large lump sum payment, hence the name balloon payment. Either an unsecured Promissory note or a secured promissory note can have a balloon payment plan.
Payable on Demand
An unsecured promissory note payable on demand does not have a maturity date. A specific time of payment is not required. As the name suggests, the lender can request the total amount of the loan at any time.
What Are Secured Notes?
Debating between unsecured and secured debt? A secured promissory note is similar to an unsecured note. The only difference is that the borrower’s assets back up the loan. Eligible borrowers receive secured promissory notes from a lender with the promise to pay on time.
A promissory note is a legal document that details the loan terms. A secured promissory note will have a secondary document attached. The secondary document proves that the borrower is the owner of the asset. If a borrower uses real estate, the document is either a deed of trust or a mortgage. If the borrower uses personal property, the promissory note will have a security agreement.
A secured note is a risky financial option because borrowers can lose personal property or real estate. If a borrower fails to repay the secured note or falls behind on installment payments, the lender can seize the asset. The benefit of a secured promissory note is that borrowers may get a lot more money than they would with an unsecured note.
How To Collect an Unsecured Promissory Note
If you lend money to someone through an unsecured note, they need to repay you according to the terms agreed on the promissory note. But how do you collect your money if the borrower defaults or refuses to pay?
Send a Letter of Reminder
The first step you can take to collect your unsecured note is formally asking for payment in writing. You can submit a letter of reminder or past due notices as soon as one day after the due date. Consider if you are willing to accept partial payment or an extended repayment plan. Suppose the borrower offers to make a partial payment. In that case, you can create a debt settlement agreement to formalize the new repayment terms with the borrower.
Use a Debt Collector
Suppose you have not received payment for an unsecured promissory note. In that case, you can use a debt collector to recoup the unsecured debt. Wondering how a debt collector works?
Debt collectors work for collection agencies. They pursue unpaid debts from borrowers that are past due. The contractual fee for hiring a debt collector is typically a small percentage of the debt collected. You can either hire a debt collector or sell your promissory note. If you sell your promissory note, then the debt collection agency owns the debt.
Sue the Borrower
What happens if you send a letter of reminder to a borrower, but they refuse to pay the Unsecured debt? If you don’t want to waste money hiring a debt collector, you can pursue legal action by suing the borrower.
Each state has a specific money limit for small court claims. For example, a debt claim in Illinois cannot exceed $10,000. Talk to a small claims court attorney or check your state’s attorney general website. You can get detailed information on the types of cases that people handle in small claims court and verify if you need an attorney.
If you need financial relief, you have many options available to you. Unsecured notes are a great borrowing option, but you may not qualify if your credit score is low. Many lenders are not willing to work with high-risk borrowers without some form of collateral. If you have bad credit but don’t want to get a secured promissory note, apply for fast payday loans online. You may be able to get a $1,500 loan when you apply today.
If you’re interest in learning more about personal finance, and topics like promissory note loan pros and cons, we cover these topics and more in the CreditNinja Dojo!