There are a lot of different types of promissory notes. Sometimes this is defined by the circumstances under which the note is being signed. A promissory note can be used when a friend or family is lending money to another. A promissory note is always signed when a bank lends money to a borrower. A promissory note can be used between an investor and a company to help the company raise funds. And of course promissory notes are often used in real estate transactions.

But, largely, when we’re talking about different types of promissory notes, we’re talking about the different repayment terms that make up the note. Here are some common types of promissory notes.

Installment promissory note. An installment promissory note is one of the most common types of promissory notes. Under these terms, the borrower agrees to repay the lender in regular “installment” payments (e.g., monthly payments). The note is usually “fully amortized,” meaning if the borrower makes regular payments according to the schedule (called an “amortization schedule”), then by the end of the term the borrower has paid off all the interest and principal due under the loan. The example above, available for you to download for free, is a typical installment promissory note.

Lump sum promissory note. A lump sum promissory note is just what is sounds like. Instead of making regular installment payments, the borrower agrees to paying the entire loan back in a “lump sum,” a single payment, on some designated date. This may be the simplest way to go if you’re lending money to friends and family. It takes the burden off the borrower to come up payments right away. You can download a free lump sum promissory note here.

Installment promissory note with balloon payment. An installment promissory note that includes a balloon payment is kind of a mix between the two repayment terms above. Here the borrower makes regular installment payments, but agrees that at some point she will make a final “balloon” payment for the remainder of the amount owed under the loan. So, instead of being fully-amortized, or spread out in equal payments throughout the term of the loan, this is a partially-amortized loan, where a larger payment is made at the end. Why would someone choose this option? Well, this could put less burden on the borrower, initially. She would have lower monthly payments than in a fully-amortized loan, and be allowed to pay a larger amount later when perhaps she’s more able to do so. This could also be a way for the borrower and lender to shorten the length of the loan term. For example, borrower chooses to pay a lump sum at the end of year three instead of extending the loan to five years. Whether or not this is a good or fair option just depends on the needs and circumstances of the parties. You can download a free installment promissory note with balloon payment here.

Secured (or collateralized) promissory note. A secured promissory note is one that is backed by collateral. In other words, the borrower agrees to put up something (like personal property or real estate) as security for the loan. In the event that the borrower does not pay, the lender can seize and sell the asset, to try and recoup his losses. This is the safest way to lend money, because it provides the lender with added “recourse,” or a way to get his money back if the borrower refuses to or can’t afford to make his payments. If you’re considering loaning a large sum of money or if you’re lending money to someone you don’t know very well, you should seriously think about using a secured promissory note. You can download a free secured promissory note here.

Promissory note with co-signer. A promissory note with co-signer includes an additional borrower (“co-signer”) on the note. Banks or other financial institutions may demand this when lending to a more risky borrower (i.e. one with poor or little credit history or lacking in assets or net worth). The co-signer typically is a better candidate for the loan and agrees to be bound by the same terms. That gives the lender the ability to pursue the co-signer for repayment if the first borrower doesn’t pay on the loan. You can download a free promissory note with co-signer here.

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The basic terms of a promissory note should answer these questions:

- Who is the borrower and who is the lender?
- What is the amount being borrowed?
- Is there interest owed, and, if so, what is the interest rate?
- When and how should the money be paid back?
- How do you decide when a borrower has “defaulted” on the note?

But there are other considerations, too. What happens if the borrower starts missing payments? Should there be a late fee? Should there be an “acceleration of debt” that requires borrower to pay the full loan immediately? What if a dispute occurs over the note? Where should it be litigated, and what state laws govern the dispute? Does the lender have the right to collect attorneys’ fees from the borrower? What about prepayment? Can the borrower pre-pay on the loan without penalty? Can the borrower assign the note to someone else? And, finally, how can the note be executed? Can it be signed electronically?

If you’re downloading a legal form online, make sure you’re note covers these scenarios, so you’re fully protected under the agreement. Hint: The free promissory note above contains all of these provisions and more.

A promissory note becomes legal or binding when it is signed by both parties. Pretty simple. Some individuals and institutions may choose to have the note witnessed or notarized for added validation, but that is not required for it to be legal.

A promissory note may need to be “enforced” when someone doesn’t live up to their end of the bargain. How you go about enforcing the note depends on whether or not it is secured. When the note is secured by collateral, then you can enforce the note by repossessing the collateralized property. This could be done on your own, or through a service which specializes in that, and in most states you’re not required to go to court and obtain a judgment first. If the note is not secured, then to enforce it you’ll need to file a complaint with the courts and obtain a judgment against the borrower. You (the lender) then has to pursue post-judgment proceedings to garnish wages or put a lien on property.