What is a 'Loan Note'

A loan note is an extended form of an IOU from one party to another that enables a payee to receive payments, possibly with an interest rate attached, over a set period of time, ending with the date at which the entire loan is to be repaid. Loan notes are usually provided in lieu of cash at the payee's request.

BREAKING DOWN 'Loan Note'

A loan note, a form of promissory agreement, includes all of the associated loan’s terms. It is considered a legally binding agreement, with both parties considered committed to the terms as they are written. A loan note can be drawn up by either involved party, though it is more traditionally completed by the lender. The note is considered valid until the amount listed on the document is paid in full by the borrower.

Information Contained in a Loan Note

The loan note contains all of the pertinent details regarding the agreement reached by the involved parties. This includes the names and contact information for both parties, as well as the principal balance and any interest rate being applied over the term. Additional information regarding the payment schedule, including the due date, will be included.

Penalty information may also be included. This can include repercussions for late payments, or information pertaining to prepayment penalties.

Examples of Loan Notes

Loan notes are used mostly for installment debts where the borrower is making a purchase of a particular good or service and paying the amount back over time. A common consumer situation involving a loan note is a home purchase, which includes a loan note along with the mortgage or deed of trust. Loan notes are also used for vehicle financing, and most other forms of installment loans.

Loan Notes and Investing

A loan note can help an individual investor avoid an undue tax hit resulting from a lump sum payment from a settlement or cash-out package from a company. In these cases, the individual is given a choice between cash or a loan note. When loan notes are used between businesses, the purchaser is able to act as a borrower and make payments over time, often at a minimal interest rate.

Loan Notes and Legal Proceedings

Legally, a loan note holds more significance than an informal IOU, even when the informal IOU is notarized. Generally, a loan note will be upheld unless either party can prove the agreement was entered into while under duress, which may make the conditions within the document void, rendering them unenforceable.

RELATED TERMS
  1. Term Loan

    A loan from a bank for a specific amount that has a specified ...
  2. Loan

    The act of giving money, property or other material goods to ...
  3. Standing Loan

    A type of loan where payments are made of interest only. Repayment ...
  4. Refinance

    1. When a business or person revises a payment schedule for repaying ...
  5. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
  6. Call Loan

    A loan provided to a brokerage firm and used to finance margin ...
Related Articles
  1. Personal Finance

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  2. Personal Finance

    Understanding Loans

    A loan is the act of giving money, property or other material goods to another party with the expectation of being repaid.
  3. Personal Finance

    Personal Loans: To Lend Or Not To Lend?

    Attempting to help a loved one with a cash loan can put a strain on your relationship - and your bank account.
  4. Insights

    An Introduction to Government Loans

    Government loans further policymakers' efforts to create positive social outcomes by offering timely access to capital for qualified candidates.
  5. Personal Finance

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  6. Personal Finance

    All About Government Loans

    There are many reasons to seek a government loan rather than one from a private lender. Government loans typically have low interest rates and offer fixed or subsidized options, as well as deferred ...
  7. Personal Finance

    Different Needs, Different Loans

    Find out what options are available when it comes to borrowing money.
  8. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  9. Investing

    Commercial Real Estate Loans

    Obtaining a commercial real estate loan is quite different from borrowing for residential real estate. Here's what to expect and how to get what you need.
RELATED FAQS
  1. Are secured personal loans better than unsecured loans?

    Read about the differences between secured loans and unsecured loans and how they are used. Learn about forms of collateral ... Read Answer >>
  2. What are the differences between delinquency and default?

    Find out more about loan delinquency, loan default, and the difference between a loan borrower defaulting and being delinquent ... Read Answer >>
  3. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
  4. What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right ... Read Answer >>
  5. How do construction loans work?

    Construction loans are obtained either by the prospective home owner or the actual builder. There are two types of construction ... Read Answer >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center