Loan Note

A loan note is an instrument issued by the lender to the borrower when the one-time grants loan to the latter. It also contains the payment terms and conditions, such as the interest rate, tenure, amount of fine, in case of default, etc.

In other words, a loan note contains all the legal bindings and obligations of both a lender and a borrower. Thus, it is a kind of agreement that clearly outlines the penalties and the procedure to be followed if one party fails to meet the agreement’s terms and conditions.  It is usually used for heavy purchases and has tax benefits for the borrower.

1. All of the legal agreements and responsibilities of a lender and a borrower are contained in a loan note.
2.  A promissory note is frequently utilized when a loan is for a smaller sum because it is less formal than a loan note.
3. The loan note is a particular tool that aids the lender in acting, recovering, and claiming a refund of the loan amount.
4. Compared to a promissory note, this note has a greater interest rate. As a result, when a loan is obtained through a loan note, the borrower must pay a higher sum.

A loan note instrument is issued when the loan amount is comparatively higher, and it is known as a secured mode of issuance of the loan. As a result, the lender receives a higher interest rate and a higher return on investment. While unlike unsecured loans, the loan note bears a higher amount of security as the borrower's credit profile is comparatively better than the other modes of lending. Mortgage-Backed lending ensures the amount of security attached to this note.

During a sanctioning of a loan, both parties must be aware of the principal amount, payment terms, and the rate of interest attached to it. To remove all future discrepancies, it is an essential means where a lender and a borrower can refer to the terms mentioned earlier and conditions. Thus, both parties can settle their queries. A proper loan note template provides evidence to both the parties depicting the terms and contract of the loan taken for a particular product or service by the borrower. First, the lender inspects the borrower's credit profile, followed by the mortgage, income tax details, etc.

It is a formal loan note agreement between the lender and the borrower, and both the parties sign an agreement consisting of the followings:

1. Amount of the loan
2. Details of the mortgage such as price, depreciation, etc.
3. The interest of the loan
4. Fine or penalty attached to the loan
5. Tenure of the loan followed by the amount of interest attached to it.

The above are the various details given in a proper loan note instrument.

Let us take the example of Max, who urgently needs a loan to buy a property. He approaches John, a successful businessman, and wants to borrow $300,000. John agrees to give Max the entire amount but asks for a loan note, which will have all the terms and conditions related to the loan and will safeguard John in case of any problem.
Thus, the document is made, that contains all the information like total loan amount, interest rate, payment terms, any fine or penalty in case the parties break the conditions, etc. Therefore, it is a legally binding contract for both of them.

• The loan note template has details which provides a special means that helps a lender recover, act, and claim a refund of the loan amount when a borrower defaults to pay the loan within the specified time frame.
• It is highly acceptable compared to a promissory note and is legally much more legally viable. Thus, legal action can be taken in case of default of a loan.
• A promissory note is an unsecured means of a contract between two parties and thus is applicable in case of a lower amount of loans. While, during a higher amount, the lender prefers to build a loan agreement with the borrower.
• Provides security to the borrower in case of claiming the principal amount during bad debts.
• This note further contains mortgage or security which is settled during the loan. Thus, in case of default, the borrower can get back the principal amount by selling the mortgage.
• The security level is higher in the case of loan note agreement, and thus the borrower needs to have a good credit rating and a higher rate of interest.

• A loan note is much more stringent than a promissory note and involves a larger amount than the promissory note. Thus, the borrower cannot escape without the repayment of the loan.
• In the case of the promissory note, the lender gives a discount during the loan payment at the stipulated date. While in the case of a loan note guarantee, the borrower is deemed to pay the principal amount and the interest attached to it.
• The borrower is deemed to repay the entire amount, and in case of delay, a percentage of interest is charged on the remaining amount. While in the case of the promissory note, the model is unsecured. Thus, if the borrower gets bankrupt, the lender can claim the proportionate amount, which can be realized only by selling the remaining assets of the borrower.
• The rate of interest attached to this note is comparatively higher than a promissory note. Thus, the borrower has to pay a higher amount when a loan is taken through a loan note.
• A borrower needs a good credit rating if he wishes to obtain a loan note, while in case of default, the lender can go to court and file a lawsuit against the borrower.

• A loan note guarantee is a secured form of debt instrument, where the lender is abided by the terms and conditions and the method of payment of the loan taken by him. While on the other hand, a promissory note is an unsecured form of contract wherein, the borrower is not deemed to repay the amount within the specified period of time.
• A promissory note is less formal than a loan note and is widely used in the case of a smaller loan amount. In case of a higher amount of loan taken by an individual or a corporate, a loan agreement becomes essential to claim the loan amount within the specified time frame.

This has been a guide to what is Loan Note. We explain its differences with promissory note, along with examples, how to write, advantages and disadvantages. You may learn more about financing from the following articles –

• Meaning of Recourse Loan
• Ninja Loans Meaning
• Soft Loan
• Loan Shark