A Short Overview of Promissory Notes

What is a Promissory Note?
A promissory note is a written promise to pay a debt. The promissory note evidences the existence of the debt and sets forth the terms of repayment. In seller-financed land purchases, the buyer will execute a promissory note in favor of the seller. The buyer promises to repay the loan according to the terms set forth in the note.

The promissory note will generally contain three types of provisions: (1) those regarding repayment, (2) those regarding interest, and (3) those regarding default.

Repayment Provisions
Repayment provisions will set forth when and how the buyer must repay the loan. The repayment schedule will specify when payments are due and how much must be paid at each interval. The repayment provision may also give the seller the right to accelerate payment if certain events occur, such as sale of the property or default by the buyer.

Interest Provisions
Interest provisions will set forth the interest rate that applies to the loan and when interest accrues. Most promissory notes provide that interest accrues from the date of execution of the note until paid in full. Some notes provide for simple interest, while others provide for compound interest.

Default Provisions
Default provisions will set forth what events constitute a default under the note and what remedies are available to the seller if such a default occurs. Default usually occurs when payments are not made when due or when other obligations under the note are not met. Remedies available to the seller upon default may include acceleration of all amounts due under the note, repossession of collateral, or foreclosure on real property securing the loan.

A promissory note is an important tool in seller-financed land purchases because it evidences the debt created by the financing and sets forth key terms related to repayment, interest, and default. By understanding what goes into a promissory note, you can be better prepared when it comes time to negotiate your own loan terms.