- Hey there, this is Seth,
and in this video, I'm going to give you
a really quick overview of what a promissory note is
and how you can put one together really quickly,
if that's something you need to do.
A promissory note is a type of lending instrument
that has been used for centuries.
And essentially what this is is just a simple document
that lays out the terms and conditions
between a borrower and a lender.
And it basically just explains that there is a set amount
of money that the borrower owes to the lender,
and it usually details any interest payments
that are included with that.
Promissory notes can be set up in all kinds
of different ways.
You can set them up with balloon payments,
so basically there's interest-only payments
for a certain amount of time,
and then boom, the entire balance is paid off,
or you can set it up with what's called
straight line amortization, which is basically just
a fixed payment for the life of the loan.
There isn't a balloon payment at the end.
A lot of times, promissory notes are used
in conjunction with real estate transactions,
whether you're getting a bank loan
or a mortgage, or a deed of trust.
A promissory note is part of the documentation
that spells out the terms of those payments
between the borrower and the lender.
Now, it's important to point out that a promissory note
is a different thing than a mortgage.
A promissory note is a different thing
than a deed of trust.
In those kinds of real estate transactions,
the mortgage is what actually secures the property,
so that's what gives the lender the right
to go in and take that property back
if the borrower ever stops paying,
whereas the note simply spells out the obligation to pay.
A lot of times, the information that's baked into the note
won't necessarily be in the collateral instrument,
and the information baked into the collateral instrument
won't necessarily be in the promissory note.
Sometimes you'll see some crossover there,
but that's not necessarily always the case.
Now, promissory notes, of course, are not just limited
to real estate transactions.
These are used between businesses, governments,
individuals, all kinds of different situations
where one party owes money to another party,
whether it's one government that's lending
another government a trillion dollars,
or if it's parents lending their child a thousand bucks,
and they want to make sure they get paid back.
If there's a set amount of money that's being lent
from one party to the other,
the lender is actually expecting to get paid back
at a certain point in time
with a certain amount of interest, at certain intervals,
it's a really good idea to create a note,
just so there is no confusion about what's going on,
and it's actually something that can legally back up
the lender, if the borrower ever stops paying.
It's a written record of the borrower's obligation to pay.
So if you're looking for a note template,
there's all kinds of versions out there.
Some of them are very, very simple, one page documents.
Others can be ridiculously complicated,
but the one that I want to show you right here
is really easy to fill out.
It's with a website called RocketLawyer.
The reason I like RocketLawyer
is because they give you a very simple questionnaire
where you just enter in all the basic information
that pertains to your situation,
and it will create the entire document for you,
so it kinda helps you make sure you don't miss any items
or leave anything blank that should be filled in.
I don't want to tell you that's the same
as getting a lawyer to do it for you,
because it's not, but if you're intent
on doing this yourself
and you're willing to take any risks inherent in that,
I think RocketLawyer is a great way to go.
So if you've got a few minutes, I'm going to take you
through the RocketLawyer website
and show you exactly how to fill it out,
just for a hypothetical situation.
And you can see what I mean,
and you'll kind of get an idea
for just how easy it is.
Follow along, and I'll show you how it's done.
Okay, so I'm going to include a link beneath this video
that links directly to this exact page
that you're seeing right now.
So if you just click on that, it'll bring you right here.
All you've got to do to get started on your promissory note
is just start by selecting whatever state you're in.
Go ahead, I guess in this case we'll do California
in this example.
Then the first thing you'll see here is
you need to enter in the loan amount and the start date.
In this hypothetical example, I'm just gonna put
a loan amount of $20,000.
For the start date, we'll put January 1, 2017.
Who is borrowing the money?
We're gonna say this is between two people,
but if you wanted to do it between businesses,
you could obviously do that too.
In this example, I'm gonna say that I am the lender
and this other person, we'll say his name is John Smith,
he is the borrower.
We'll start by putting in the name of the borrower,
and then we'll put in his mailing address, as well.
This is a fake person, just in case you were wondering.
If there are multiple borrowers, you would check this box
down here, but just to keep this simple,
we'll say it's between two people in this case.
Then who is lending the money?
We're going to say a person.
We'll say it's me, I'm the lender.
Again, if there were multiple people
that were acting as the lenders together,
you could check this.
But again, I'm not gonna go there here.
Then will John Smith have to pay interest on the loan?
We're gonna say yes, this is an interest-bearing note,
and what's the interest rate John Smith will pay?
You can really put whatever interest rate
you come up with.
In this example, I'm going to say 8%.
Beginning date, we'll say it's going to begin
on January 1 as well.
And also keep in mind, if you ever get hung up
or stuck on any one of these questions,
perhaps you just don't know how to answer it
or you don't understand what you're supposed
to be putting in here,
at any point in time, you can enter in a little question
over here, just type in,
say whatever your question is
and then click that ask button,
and it will go directly to an actual attorney,
and they will respond to you with some kind of feedback
on how to complete the document.
So you're not necessarily on your own
if you're filling out a promissory note
through RocketLawyer.
You can get help.
Usually I think you'll find the explanations they put here
are pretty helpful, like it's pretty rare
that I don't understand it after reading that.
But if you do find yourself in that situation,
you do have access to attorneys
through this site, as well.
So in this case, if the promissory note is not paid
by the due date, will John Smith be charged
a higher interest rate on the remaining principal amount?
Basically, is there some kind of penalty
as a result of not making that payment?
In this case, we'll say sure, yes.
What will the default rate be?
I don't know, we'll bring it up to maybe 9.99%.
How will the promissory note be paid?
We're gonna say in installment payments
of principal and interest.
That's probably the most common way that people do it.
But if you wanted to do on demand,
you just get it all whenever you demand it,
that's one option,
or you can set one specific date at which
you get paid everything,
so maybe three years from now, you get all of it,
but they don't have to make payments in the meantime.
Or installment payments of interest only.
So the principal balance doesn't go down,
but they do pay you that interest income.
So a lot of different options.
This top one is usually what I do,
so that's what I'm going to go with.
What are the details of the repayment agreement?
I'm gonna say that this loan is going to be paid off
over the course of five years.
So if we're doing one payment a month,
that would be 60 payments altogether.
And then balloon payment, that's like if the loan
was gonna amortize over 15 years,
but we're only gonna extend these payments for five years,
so basically at the end of the five years,
there's still a lot of principal owing,
so at that point I would enter in
what the balloon payment would be.
In this case, I'm not gonna put a balloon payment,
I'm just gonna have it be amortizing
with principal and interest over five years.
That's how I'll handle this.
Should an amortization schedule be included
in this promissory note?
That's one of the really nice things about RocketLawyer
is that if you do choose the option that I'm doing,
or whatever you're putting in there,
it will actually calculate what those payments are,
it will create an entire loan schedule
of those payments that need to be made.
Just so there's no confusion about how much
needs to be paid, what those payments are going to,
principal and interest, and when those payments are due.
So I'm gonna say yes, definitely in this case.
Will a late fee be charged if an installment payment
is past due?
I'm gonna say yes, absolutely.
For me, I'll just say a late fee of $25.
Probably sort of depends on the amount of the loan
and what you think is a appropriate.
But if you want to do a fee, put that in there.
And then when will the late fee be charged?
I usually say like 15 days after the due date.
If you wanted to 10 days, you could do something
like that too, or whatever you want, obviously.
And then, will John Smith receive a discount
if the promissory note is paid off early?
I'm gonna say no.
But if for some reason you wanna give an incentive
to your borrower to hurry up and pay you off sooner,
you could say yes,
and then specify what that discount would be.
Can early payments be made on the loan without penalty?
In my case, for my situation, I almost always say yes,
that's fine if they pay that without penalty,
because I'd rather be paid off early
than not paid at all.
That's what I would do, but again,
that's not what you have to do at all.
Whatever the situation is between the borrower and lender
in your situation that will govern
whatever the right answer is for you.
So anyway, I'm gonna click yes here.
Click continue.
Will this promissory note be secured with collateral,
personal property or real estate?
If this like specifically for a real estate deal,
say if you're doing a promissory note with a deed of trust,
then you would say yes, absolutely.
You're obviously free to say no as well.
In this case, I usually use this kind of thing
in conjunction with a deed of trust,
if and when I'm ever using a note.
So I'm gonna say yes.
And then which type of property will John Smith use
to secure the promissory note?
Personal property, that basically means equipment,
so if there was some piece of equipment
that you could remove from a property,
or take and then liquidate to recover
from the defaulted amount,
that's what personal property is.
Real estate is exactly what it sounds like,
just real estate.
If the borrower has land, or a house,
or some kind of property that's the ground
or fixed to the ground, that would be real estate.
Or none.
Again, I'm going to chose real estate in my case.
And then, what is the real property being secured by?
I usually do a deed of trust,
because usually when I'm using this document,
it's in conjunction with a sale of finance,
piece of real estate that I'm selling,
which if I'm using a promissory note at all,
it's because it's in conjunction with a deed of trust.
A mortgage deed is another option in some states,
but in most of the places where I work,
the deed of trust is the one to use.
And then when was the deed of trust signed?
We're gonna say the closing date for everything
is January 1, so we'll stay consistent with that.
What is the address of the real property being held
as security?
You would just put in whatever that address is.
So we'll just make something up here.
Which state's laws apply to this promissory note?
We're gonna say California, because that's
where the property is, that's where the borrower is,
and that's just kind of where most of the stuff is.
If you wanted to do, you could put whatever state
you are residing in,
so that any court cases have to come to you to get resolved.
That's really whatever you want to do.
I'm not gonna tell you what the best option is.
It's kind of up to you to decide.
Once you've got that selected, you would click continue,
and then will there be a co-signer on this loan?
In other words, is there going to be another person
supporting John Smith to be legally obligated
to make the payments?
If there is, obviously you could put them
and include their information.
I'm gonna say no, just to keep it simple.
And then will Seth Williams be able to sell
or transfer the loan to another party?
So if you ever wanted to be able to sell the note
and basically just get paid,
that's something some people like to do.
I personally don't see why not.
It's nice to just have the option,
doesn't mean you have to do it.
So I'm gonna say yes in this case.
Once that's finished, RocketLawyer will generate
the promissory note document for you,
with all the information you put in there,
and as you can see, it's pretty straightforward and simple.
This shows us exactly what the language of the note
looks like, there's the amortization schedule as well,
which calculated all the payments
and lists all the due dates,
and we can also go ahead and download this.
I'm going to download it as a Word document.
Also, keep in mind, if you want,
you can sign this right here, digitally.
Why don't I just go ahead and do that?
Once you've signed it, it's pretty cool.
All you have to do is enter in the email address
of the borrower, whatever that is,
and then it will send this to them
and then they can sign it digitally.
So you don't even really have to print it off
if you don't want to.
Again, that's totally up to you.
Once you've downloaded it, you can go ahead
and open it up, and then you can see it right here.
Let's change the view of this thing a little bit.
There you have it.
As you can see, it's pretty straightforward
and easy, it's not a terribly complicated document.
It's got all of the blanks where people need to sign.
It's pretty easy to follow, you just read the information.
If you have any questions about it,
and obviously since this is a Word document,
you can edit any of this if you want.
I can just highlight it and delete it
and replace whatever you want to.
If you wanted an attorney to review this for any reason,
you could do that.
And then down here, we've got
the loan amortization schedule,
it looks a little messed up.
If you wanted it to look a little bit sharper,
you could download the PDF version.
There we go.
On the PDF, it's a little bit easier
to read the amortization schedule.
That's the nice thing, is that you can download it
in an editable format, or you can download it
in a format that cannot be changed.
Say, if you wanted to email this to the other party,
and you didn't want them to be able to mess with anything,
this is a great way to do that.
So yeah, that's how RocketLawyer works
if you want to put together a promissory note.
Pretty easy to do.
RocketLawyer is a really solid option.
I've been using this site for several months now.
I've found it to be really helpful.
They've got, like, literally hundreds
of different legal forms and templates
that can be specified based on whatever state
you're working in.
Pretty much any document you can imagine, it's all here.
So if this is something you want to check out,
the price is really not bad,
especially if this is something you're going to be using
on an ongoing basis.
It's set up as a subscription.
This is the one that I'm currently using right now,
and if you want to,
you can get a little discount if you pay for a full year
at a time, and also, keep in mind,
if this is the kind of thing where you only need this
for one document and that's it,
it's totally feasible to just subscribe for one month
and then unsubscribe, and get your document
and be done.
If you ever need to come back,
it's really easy to do that.
So it's not like you have to commit to several years,
or pay for this for the rest of your life.
It's just, you just sort of use it for what you need it,
and if it's not useful to you anymore,
then you can just unsubscribe.
It's pretty simple.
I do have an affiliate relationship with RocketLawyer,
just for full disclosure.
I have a link beneath this video, like I mentioned before,
if you click on that and fill out your promissory note
through that link, I will get a small commission
if you decide to sign up
for the RocketLawyer service.
Yeah, that's it.
I hope this video was helpful to you on some level,
and I appreciate your time in checking this out.
Hopefully, I will see you again soon.