What is an unsecured promissory note

Promissory note

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The term debt has a great meaning in finance, among other things. The debtor's note arose from the debt of owing a person a sum of money or an object. Promissory notes have existed since the 19th century and have not lost their popularity to this day.

The promissory note is the written fixation of an existing debt. Therefore, a promissory note is technically exactly what is known as the recognition of a debt by the debtor. With the existence of a promissory note, there is also an obligation to settle this debt. In the legal system, therefore, one speaks of a document in which the guilt is established and at the same time confirmed. In the promissory note, the debtor only recognizes that he has to pay back a certain amount of money to a creditor. Nevertheless, the promissory note is not to be equated with a claim. In addition, a promissory note is considered a constitutive notarization.

If the promissory note came about through a loan, then the document proves that this transaction has been agreed. With a promissory note, the burden of proof is transferred from the creditor or the lender to the borrower or the debtor. Borrower's notes are usually used to process debt financing for private individuals or companies. Therefore, promissory notes are a popular means of being used as a relatively reliable investment among private individuals.

In practice, a promissory note has a meaning mainly with a loan. It usually results from a credit or loan agreement. It is a money substitute or money surrogate. Therefore, a promissory note can also be used as a cashless means of payment. However, a new creditor who has claims against a debtor need not always accept a promissory note as settlement of a loan. In this sense, the use of a promissory note in payment transactions is restricted. The promissory note does not have the same meaning as a security.

On the basis of the issue of borrower's note, a borrower's note loan is usually spoken of. A credit agreement is concluded between the obligee and the debtor, whereby the borrower's note becomes the property of the obligee. The promissory note also takes on the function of the credit agreement. The basis for this value is an entry of the debtor as a businessman in the Commercial Code.


Types of promissory notes

A promissory note is just a variant of the bond. The effect of the promissory note is only given under certain formal requirements. This includes, among other things, the debtor's signature. Why the debt originally arose does not have to be stated on the promissory note. However, it is important that the contents of the debt be identified. Only in this way can the promissory note become legally valid as evidence of a debt.

If a creditor is no longer liquid or is not solvent to another creditor, he can suspend the promissory note until these claims accrue. This can also be the case at a much later time when the promissory note was concluded.
German securities law applies to all promissory notes.

In connection with promissory note loans, a distinction is made between two versions of promissory notes. This is on the one hand the maturity-congruent promissory note and on the other hand the revolving promissory note. Borrower's note loans are also subject to special criteria. They cannot be paid out early and there are no special payments. In financial transactions, borrower's note loans are therefore considered to be inflexible and rigid agreements. Land charges are predominantly used as the basis for such promissory notes, although the promissory note is also not recognized as a security. In relation to trading on the stock exchange, promissory notes cannot be used. However, the certificates can easily be used over the counter.

Promissory notes and interest

Interest is also charged to borrower's notes. The interest rates are usually around two or three percent. The interest on promissory notes is also subject to economic fluctuations such as recessions or booms. The determination of the interest rate is also controlled speculatively for the borrower's note.

Promissory note with matching maturities

In contrast to the revolving promissory note, a fixed or fixed interest rate is concluded over the entire term.

Revolving promissory note

The interest rate of the promissory note can fluctuate at intervals during the term. The interest rate therefore does not stay the same. Depending on the economic situation, one of these agreements will be selected in mutual consultation.

Advantages of a promissory note

Many large companies currently see the promissory note or promissory note loan as a worthwhile type of financing. This has to do with the fact that such bonds allow various flexible arrangements between the lenders and the borrowers. Bonds are rather rigid compared to promissory notes. So-called bullet payments or repayments and fixed terms make a promissory note relatively secure. In addition, a promissory note is an uncomplicated procedure for making investments quickly, even on a large scale. In the present, it is primarily medium-sized companies with an annual turnover of around 300 million or more who benefit from the promissory notes. As a result, borrower's notes have become indispensable as diversified sources of money in the financial market. Private individuals tend to rely on installment loans for their loans.

Further advantages of a promissory note are its low costs and the low level of information required. To issue a promissory note, approximately 0.2 to 0.5 percent of the loan amount should be estimated. Both the interest and the additional fees to be paid are rated lower for the promissory note than for bonds. Requirements such as a minimum loan amount and a minimum volume of around 50 million euros are also unnecessary.

Disadvantages of a promissory note

In contrast to other alternatives, promissory notes generate fairly high interest rates. Companies often criticize the minimal flexibility that comes with a promissory note. This mainly means that no early repayment is allowed in order to shorten the term and to save interest.

A second reason why promissory notes do not necessarily prevail everywhere is the use of additional collateral. The creditworthiness requirements are extremely high.

Promissory note - formal requirements

In order to ensure the legal validity of a promissory note, special formal principles must be observed when it is issued.
First of all, both the current date and the amount borrowed must be noted on the borrower's note.

As a prerequisite for determining the term and the end of the repayment, the date on which the debt must be paid in full is entered on the promissory note. This setting of a deadline is important in order to have a due date for a possible reminder if there is no repayment.

A promissory note is only complete when the interest (maximum 20 percent) is mentioned. What lies above is seen as usury.

A promissory note is incomplete if the signatures on both sides are missing. That is, the name of the debtor and that of the obligee. Different types of writing are best. Once printed letters for better legibility and once the handwriting of both parties. In order to be able to successfully settle a legal dispute if the debt is not paid, uninvolved witnesses must be noted with their signature on the promissory note.

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