Each type of note is a specialized tool-Learn to use the right tool for the job
Retirement and Investment
Financial planning, retirement planning and general investing require using the correct financial tools. Promissory notes are a category of investing vehicles (tools) that range from the ordinary to the unusual, and each type is designed to accomplish a specified objective. To acquaint you with the wide verity available, let’s briefly examine several distinct types of notes.
The Common note
The common, ordinary promissory note can be defined as a written, signed, unconditional promise to pay a certain amount of money on demand at a specified time. It is a written promise to pay money, or to repay borrowed funds, or take out a new loan. It is used with all types of bank borrowing, lines of credit, house financing, auto financing and furniture and appliance financing.
The Self- amortizing real estate mortgage note
A self amortizing real estate mortgage note is an obligation that provides for equal payments, composed of principal and interest, that are payable monthly, quarterly or annually during the term of the debt. No additional payment is required at maturity; the borrower need not make a lump-sum balloon payment at the end of the loan term. Lenders usually provide amortization tables showing exactly how much principal and interest are paid over the full term of the loan.
The Balloon note
It is also called bullet loan or balloon loan. A balloon note is a loan that has one large principal payment due upon maturity. A balloon note has interest only payments and requires little capital outlay during the life of the loan because all of the principal repayment is deferred until the end of the payment period-the maturity date.
Balloon notes are often used when refinancing an existing loan or when a future cash need is anticipated. Balloon notes are often used within business operations. A balloon loan requires interest only periodic payments, until the maturity date (due date) when the entire principal must be repaid.
Along with loans to businesses, the balloon note is sometimes used in real estate. A real estate mortgage loan can be structured with interest only periodic payments followed by a balloon payment. This structure allows for reduced monthly payments, capped off with one large balloon payment at the end of the mortgage period.
The Commercial note
Commercial promissory notes are loan agreements between borrowers and lenders in a business context. In case of a failure by the borrower to repay the loan the commercial lender will legally enforce a lien on the borrower’s assets. If a borrower defaults on a commercial promissory note, the lender need not wait to receive repayment, but can demand full payment immediately.
The Cognovit note
When a default occurs under this type of note, it causes an automatic confession of judgment against the borrower, and gives the lender the immediate right to collect the sum owing. The borrower acknowledges the claims asserted by the lender against him are valid and waives all defenses. This instrument is given to avoid the expenses of protracted litigation. Laws relating to cognovit notes vary by jurisdiction, and are disallowed in some jurisdictions. Some cognovit notes are enforced by suing in court to enforce payment of money; however, some contain terms allowing it to be enforced in a method other than by action of court.
The Self-canceling installment note
Self-canceling installment note (SCIN) is a promissory note cancelled upon the death of the lender. The unpaid balance of a SCIN is not normally included in the lender’s estate for tax purposes. SCIN is also known as death-terminating installment note. This instrument is used by financial planners, estate and tax attorneys, and wealth managers to minimize taxes.
The Bank note
Bank notes are promissory notes issued by a bank payable to a bearer on demand. A bank note is issued for money circulation, not in connection with a loan. Although a bank note resembles a promissory note, it is not security for money lent. In business transactions, bank notes are issued for payment of money. A bank note is transferred through delivery. The holder of a bank note is entitled to immediate payment. Fraud committed by a former holder in obtaining a bank note will not affect a present holder.
Summary– the right tool for the right job
There is a wide variety of promissory note types available; they are each needed to accomplish specific financial goals; selecting the correct one for the specific job is a critical decision. Since the average person is not an expert in this field, it is a wise financial decision to work with an experienced professional.