How Promissory Notes Can Simply An Agreement
A promissory note in Canada is merely a contract between two people or parties who have exchanged money. The contract is between one party who has lent the money to the party who has borrowed the money. Promissory notes can be used for both personal or business purposes and are often utilized in a scenario where the buyer is unable to pay a full balance upfront when purchasing something, and therefore, promising to pay the remainder at a later date. The amount of money that is owed is also referred to as the principal. The promissory note would include a variety of details for clear understanding between the two parties, such as the principal, interest rate and the date(s) in which payments should occur. The date in which the repayments is due is also known as the maturity date.
Not all promissory notes may have a date for repayment as some agreements can include what is known as a ‘Demand Promissory Note’. If a Demand Promissory Note is agreed upon then the date of repayment is not listed; however, the debt must be repaid when the lender demands payment. In such a case, the party who has borrowed the money may only receive a few days advance notice to repay the debt. In addition, a promissory note would also include details such as penalties bestowed upon the borrowing party if the funds are not paid on time, along with any grace periods to accommodate payment. Promissory notes are often drafted by the party who is lending the money to ensure that all the necessary clauses are in place and that the agreement provides sufficient protection. It is worth noting that lenders need to be aware of any laws in their jurisdiction revolving around the maximum interest rate that they can charge the party they're lending money to. In Alberta, the criminal code allows for the interest rate to reach a maximum of 60% on loans; however, there are exceptions. For instance, Alberta created regulations in 2009 which allows 600 percent interest to be charged from licensed companies, only. In addition, the lender may also choose to have security for their loan as a type of collateral. Examples of collateral can include obtaining the title to a car or placing a lien or mortgage on real estate. If the borrower files for bankruptcy, the lending party could use the security to regain access to their money. Promissory Notes differ from an IOU form, as they include an intention to repay the debt by including repayment details. On the other hand, an IOU simply acknowledges that liability between two parties exists, typically with no further detail or payment plan or deadline. A Promissory Note is always recommended as it serves as a better recognition of an agreement. Loan agreements also differ from a Promissory Note as loan agreements contain more extensive clauses. Another slight difference between the two is the fact that only the borrower signs a promissory note, while a loan agreement requires the signature of both the lender and borrower. The terms detailed in the note serve as a legal contract, so individuals need to ensure that they fully understand exactly what the detail entails before signing. There is no need to have it notarized, as long as the borrower signs it is enforceable.
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