When you attempt to borrow money from another party, whether it is a close friend or an organization, be prepared to sign a promissory note. The promissory note is a protection for the lender. Before you agree to sign a promissory note and accept a loan from another party, make sure you understand all about binding agreements.
Promissory Notes
A promissory note outlines a promise between a promissor or borrower and a promissee or lender. The promissor agrees to repay the money he's received on loan within a set period of time. The promissory note also includes the interest rate, monthly payment amounts, terms of defaulting on the loan and any security put down as collateral for the loan.
Binding Agreements
When an agreement is binding it means that it is enforceable by law. The parties of the agreement have the right to pursue legal action if necessary pertaining to the terms of the agreement. If not in court, the two parties can also engage in binding arbitration to resolve the matter. The specific rules of law regarding binding agreements vary by state.
Is Promissory Binding?
A promissory note, no matter if it is a fully detailed contract with many sections and clauses or a handwritten agreement with just a few lines, is binding in most cases. The person who draws up the agreement (the lender) has the right to sue the other person to collect the money owed if he defaults. The lender can present a copy of the promissory note as a part of her evidence to prove the debt.
Possible Exceptions
One situation where a court of law might not deem a promissory note binding is if the agreement asks the borrower to agree to illegal terms, such as a usurious (too high according to state laws) interest rate. Also, a minor (usually under 18) cannot sign a promissory agreement without the consent of a parent. If the person isn't mentally competent to sign, that could also nullify the contract. In any binding contract, one party must exchange something of value with the other party --- this is also called consideration. In the case of a promissory note, the lender exchanges cash for the promise of repaying the note, sometimes with interest.
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