Types of Promissory Note Repayment Plans

You and the borrower should agree on a plan for repaying the loan. For instance, you'll need to decide on the repayment terms and whether you'll require the loan to be secured.

What Are the Different Types of Promissory Notes?

Some of the different types of promissory notes include:

• a note that requires repayment in installments of equal amounts
• a promissory note payable in a lump-sum payment, and
• a promissory note with a balloon payment.

Installment Payments in Equal Amounts

In an installment payment plan, the borrower makes equal monthly (or yearly) payments for a specified number of months (or years) until the loan is paid off.

If you charge interest, part of each payment goes toward interest, and the rest goes toward the principal. The loan and interest are fully paid when the borrower makes the last payment.

Lump-Sum Payment of Principal and Interest

With many loans to friends and family members, the borrower pays off the loan in one payment at a specified future date. This payment includes the entire principal amount and the accrued interest, if any.

Again, consult online calculators to determine the total interest amount due under your particular plan.

Balloon Payments

Although rarely used in loans between family and friends, you can also structure a loan with a balloon payment. In this plan, the borrower makes equal monthly payments for a set amount of time. The payments can cover either interest and principal or interest only. These payments pay off some, but not all, of the loan.

Then, the borrower makes one final, large payment (called a "balloon payment"), which pays off the rest of the principal and the remaining interest.

Securing the Loan with Property

In a secured loan, the borrower pledges property, like a car or house, as collateral to guarantee payment. If the borrower doesn't pay, the lender gets to take (or can foreclose on) the property.

Most personal loans are unsecured. However, if you want security for a personal loan, consider what property will secure the loan and what documents you'll need.

• Tangible personal property. This kind of property is physical personal property, such as a car, jewelry, or computer equipment. Complete a security agreement along with the promissory note.
• Real estate. If you want to secure the loan with real estate, you need a mortgage or deed of trust. Consult a real estate lawyer.
• Intangible personal property. This type of property includes assets, such as copyrights, trademarks, patents, and ownership rights in a business. If you want to secure your loan with intangible personal property, consult a lawyer.

Can You Write Your Own Promissory Note?

You can create your own promissory note using a template or an online fillable form.

For example, you can create your promissory note with Nolo's promissory note form. Choose from the various different types of loans accessible within this form:

• Installment loan without interest. The borrower pays off the loan in equal monthly or annual payments over a set time, usually a number of years.
• Installment loan with interest (amortized). The borrower pays off the loan in equal payments over a set time, usually a number of years, and each payment is applied partly to interest and partly to principal.
• Lump-sum payment. The borrower pays off the borrowed money, plus interest, in one payment.
• Interest-only payments (balloon payment). The borrower makes monthly interest payments only and then pays off the entire principal in one lump sum.

Or, if you need more help, consult with a lawyer.

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