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.

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