The words on the note.
Short definitions of the terms used in promissory notes, loan agreements and schedules. Each links to the guide that covers it in depth.
- Acceleration clause
A clause that lets the lender declare the entire unpaid balance due at once after a default, instead of waiting for each installment to fall due. Without it, the lender can only pursue missed payments one by one.
- Amortization
Repaying a loan through regular payments that each cover the interest due for the period and reduce the principal. With a level payment, the interest share falls and the principal share rises over the term.
- Amortization schedule
A table listing every scheduled payment with its due date, the interest and principal portions, and the balance remaining afterwards. It is usually attached to the note.
- Applicable federal rate (AFR)
Minimum interest rates the IRS publishes each month for short-term, mid-term and long-term loans. A loan between related parties that charges less than the AFR is treated for tax purposes as if it charged the AFR.
- Balloon payment
A final payment much larger than the regular ones, typically the whole principal on an interest-only loan or the remaining balance on a loan whose payments were set on a longer amortization than its term.
- Basis points
Hundredths of a percentage point. A rate of 6.25% is 625 basis points. Notes and schedules in NoteHouse store rates in basis points so arithmetic is exact.
- Borrower
The party who receives the loan and promises to repay it. On a promissory note the borrower is sometimes called the maker.
- Collateral
Property pledged to secure a loan, such as a vehicle, equipment or real estate. If the borrower defaults, the lender can take the collateral by the procedure the law and the security documents set out.
- Deed of trust
In many states, the document that secures a loan against real estate by conveying the property to a trustee until the loan is paid. It is recorded with the county and is paired with a promissory note. Other states use a mortgage for the same purpose.
- Default
A failure to perform under the note, most often a payment that is not made within the grace period. The note defines what counts as default and what the lender may do about it.
- Disbursement
The advance of the loan funds from the lender to the borrower. Interest runs from the disbursement date, which is the first entry in the loan’s ledger.
- Electronic signature
A signature made electronically, such as a typed name with a record of the signer’s identity, intent and the exact document signed. Valid for promissory notes under the federal ESIGN Act and state law.
- Fixed principal
A repayment structure in which the same amount of principal is paid each period, plus interest on the remaining balance. Payments start higher and shrink over the term; total interest is lower than an amortizing loan of the same term.
- Forbearance
A lender’s agreement, usually in writing, to hold off on enforcing the note for a period while the borrower catches up. Interest normally continues to accrue.
- Grace period
The number of days after a due date during which a payment can still be made without a late fee or default. Ten to fifteen days is common on private notes.
- Imputed interest
Interest the tax law treats as having been paid on a below-market loan even though it was not. The lender is taxed on it and the difference may be treated as a gift. Charging at least the applicable federal rate avoids it.
- Installment
One scheduled payment on a loan. An installment on an amortizing loan contains interest for the period and some principal.
- Interest-only
A repayment structure in which each periodic payment covers only the interest accrued, so the balance does not fall. The full principal is due at maturity as a balloon payment.
- Late fee
A charge for a payment made after the grace period, either a flat amount or a percentage of the overdue installment. It must be stated in the note and be reasonable.
- Ledger
The running record of every transaction on a loan: the disbursement, each interest posting, each fee and each payment, with the balance after each. In NoteHouse the ledger is append-only and each entry is hashed with the one before it.
- Lender
The party who advances the money and is owed repayment. On a promissory note the lender is sometimes called the payee or holder.
- Maturity date
The date on which the last of the principal and any remaining interest is due. For an installment loan it is the due date of the final installment.
- Mortgage
The document that secures a loan against real estate in states that do not use deeds of trust. It is recorded with the county and gives the lender the right to foreclose if the note is not paid.
- Negotiable instrument
A written, signed, unconditional promise to pay a fixed sum on demand or at a definite time, which can be transferred so that the new holder may enforce it. Most promissory notes qualify under Article 3 of the Uniform Commercial Code.
- Payoff statement
A statement of the exact amount needed to pay a loan in full on a chosen date: principal, interest accrued through that date, any fees, and the per diem interest to add for each day after it.
- Per diem interest
Interest for one day, used to adjust a payoff amount if payment arrives after the statement date. For simple interest it is the principal multiplied by the annual rate, divided by 365.
- Prepayment
Paying some or all of the principal before it is due. Most private notes allow it without penalty. A prepayment reduces the balance, so later installments carry less interest.
- Principal
The amount lent, before interest. Interest is computed on the principal still outstanding, and each payment reduces it after fees and interest are covered.
- Promissory note
A signed document in which the borrower promises to repay a stated sum to the lender on stated terms: the amount, the interest, the schedule and what happens on default. It is the evidence of the debt.
- Security interest
A lender’s legal right in specific property of the borrower that secures repayment. It is created by a security agreement, mortgage or deed of trust, not by the note itself, and is usually made public by recording or filing.
- Seller financing
A sale in which the seller lends the buyer part of the price, taking a promissory note and usually a mortgage or deed of trust on the property instead of full payment at closing. Also called owner financing.
- Simple interest
Interest computed only on the principal outstanding, never on unpaid interest. Private notes almost always use simple interest; the rate is annual and each period charges its share of it.
- Term
The length of the loan from the funding date to the maturity date, usually stated in months or years.
- UCC-1 financing statement
A public filing with the state that gives notice of a lender’s security interest in a borrower’s personal property, such as business equipment or inventory. Filed after a security agreement is signed.
- Unsecured loan
A loan backed only by the borrower’s promise to pay, with no collateral. Most loans between relatives and friends are unsecured.
- Usury
Charging interest above the maximum a state allows. Limits and exceptions vary widely by state and by the type of loan; a rate above the limit can make the interest, and sometimes the loan, unenforceable.
Put the loan in writing.
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