A secured promissory note is one of the safest ways for a lender to loan money, assuming the “security” pledged under the note is of equal or greater value than the money loaned, and assuming it won’t take a great deal of effort to sell or liquidate the asset. You should use this type of promissory note if you are at all unsure about the borrower’s ability to pay back the loan. Most financial institutions require collateral on larger loans.

Along with the terms you’ll find in a non-secured note, like the amount being loaned, the date the loan should be paid back, and how it should be paid, a secured promissory note needs to also list the collateral that is being pledged to secure the note. A clear description of the collateral should be given. Real estate is typically secured through a mortgage agreement or deed of trust. Personal property may be secured through various ways, depending on what the property is. Business assets, for example, like inventory, equipment, or accounts receivable, may be secured using a financing statement, also called a “UCC” or “UCC-1” statement. To secure a motor vehicle, on the other hand, you have to reference the security interest on the title itself. Typically, you first identify the vehicle (VIN, make, model) clearly in the promissory note, and then add the loan details to the lien section of the title certificate and file the title certificate with the DMV.