Michigan Promissory Note: What Is It?
A Michigan promissory note is a written to memorialize a loan agreement between a lender and the borrower. There may or may not be a co-signer. Promissory notes may be secured or unsecured. Secured notes promise that the lender will receive collateral mentioned in the promissory note if the borrower does not fulfill their duties related to the repayment of the loan. An example of a secured promissory note is a car loan. If payments aren’t made, the lender will take possession of the vehicle. Michigan promissory notes are subject to contract law in the state.
What Is the Maximum Amount of Interest That May Be Charged?
In Michigan, the maximum amount of interest that may be charged depends on whether there is a written agreement. Without a written agreement, the maximum legal interest rate is 5%. With a written agreement, such as a promissory note, the maximum legal interest rate is 7%. It’s also important to note that there are several exceptions. However, MCLA 438.41 also states that it is a criminal offense to charge more than 25% interest per year.
How to Write a Michigan Promissory Note
The first consideration in writing a Michigan promissory note is its title. If the promissory note is secured, it is important to title it as such. Otherwise, the court will likely not award collateral. Instead, the note will be treated as unsecured. After the title, the Michigan promissory note should contain certain information to explain the relationship between the parties:
- The date that the parties entered into the agreement. This date is placed below the title and is written as month, day, and year. The date is an important component because it helps determine other legal deadlines if a legal dispute occurs because of the agreement or legal relationship between the parties.
- Identify each party by their legal name and their role within the contract. The parties are the lender, the borrower, and the co-signer. Co-signers aren’t required. List the legal name of each party and their role. For example, Samantha Sue Smith, Co-Signer.
- The address for each party. The mailing address should be listed for each party. For secured Michigan promissory notes, it may be helpful to include the physical address of the borrower and any co-signer if it is different from the mailing address. If the lender has a payment address that is separate from the mailing address, the payment address should be included in the section that addresses the actual repayment agreement.
- The principal amount loaned. A Michigan promissory note should list the total amount provided by the lender to the borrower. This does not include the interest charged for the loan. Before it is signed, make sure that the amount listed is correct.
- The amount of yearly interest charged on the loan. In Michigan, the maximum amount of interest that may be charged when there is a written agreement is 7%. This is often expressed as per annum or as the annual percentage rate (APR).
- Repayment information. All Michigan promissory notes should include repayment information. This includes the number of payments (referred to as installments), the amount of each payment, the due date for each payment, and whether there is a late fee assessed. The late fee amount should be documented in this section as well as when the charge will be added to the account.
For secured Michigan promissory notes, it is important to provide information about the collateral. Without this information, the court will likely not treat the agreement as secured.
After the above information, a promissory agreement includes certain clauses that explain the terms and conditions that must be followed. The following is a partial list of common clauses that are often found in these sorts of agreements.
- Interest Due in the Event of Default. This clause documents the amount of interest that is charged if the borrower defaults. It is often at the higher end of what is legally allowed.
- Payment Allocation. The purpose of this clause is to explain how each payment is split between the principal balance and the interest charged.
- Prepayment. A prepayment clause documents whether there is a penalty for the borrower if they pay off the loan earlier than expected.
- Acceleration. Acceleration means that the lender may demand immediate repayment of the remaining money owed if the borrower does not comply with the terms of the agreement.
- Attorney Fees and Costs. If there is a legal disagreement over the promissory note, this clause is used to explain how attorney costs and fees for each party will be handled.
- Waiver of Presentments. With this clause, the lender does not need to be physically present for the borrower to make their payments as required.
- Severability. A severability clause enforces the rest of the promissory note if one area of it is found to be invalid.
- Conflicting Terms. This clause explains how any conflicting terms found in the promissory note will be addressed.
- Notice. This clause states whether the lender will notify the borrower if the lender plans to sue the borrower for defaulting on the agreement.
- Governing Law. A governing law clause documents the state whose laws will be used if a legal disagreement arises.
There is no legal requirement to have most Michigan promissory notes witnessed or notarized. However, a notary may be required for a promissory note related to a home loan. The borrower and any co-signer is required to sign and date the document for it to be executed.
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