Promissory Note

In depth

The promissory note is the IOU that documents the loan in any seller-financed deal. It states the principal, interest rate, payment schedule, maturity date, late charges, default provisions, and any balloon payment. The note is separate from the security instrument, which is either a mortgage, deed of trust, or land contract. Misconception: people often think the deed or mortgage is the loan; the note is the actual debt obligation, and the security instrument merely secures it. Practically, originals matter. The original wet-ink note should be held by the seller until satisfied, then marked paid and returned to the borrower. Notes can be sold on the secondary market, and a properly drafted note with allonges supports later assignment. Always include the AFR or higher to avoid imputed interest.