Texas Promissory Note: What Is It?
A Texas promissory note is a contract between a borrower and a lender. The lender agrees to provide a loan. The borrower promises to repay it according to the terms of the agreement. There may be a co-signer who agrees to satisfy the loan if the borrower does not. There are two types of Texas promissory note: secured and unsecured. A secured promissory note involves collateral. If the borrower doesn’t comply with the terms of the contract, the collateral is given to the lender to satisfy all or part of the outstanding balance. A loan for a vehicle is an example of a secured promissory note. An unsecured promissory note doesn’t involve any sort of collateral as repayment for the loan.
What Is the Maximum Amount of Interest That May Be Charged in Texas?
The maximum amount of interest that may be charged in Texas depends on whether the interest rate is addressed in writing. In writing, the maximum interest rate is generally around 18% although there are some exceptions to the law. If the interest rate is not addressed in writing, the maximum amount of interest that may be charged is 6%.
How to Write a Texas Promissory Note
When writing a Texas promissory note, the first step is to ensure that it has a title that reflects whether the note is secured or unsecured. A secured Texas promissory note should use the word “secured” in the title to help ensure that the lender’s right to collect the mentioned collateral is protected. Then, information about the parties involved and the loan is used to create the main agreement:
- The date the Texas promissory note was drafted. This date is placed below the title of the note. It is written as month, day, and year. Along with the date of the signatures, the creation date helps show that the borrower acknowledges they owe the money and helps determine specific legal deadlines.
- The name of each party and their role within the contract. Use the legal name of the borrower, lender, and any co-signer. Include their role after their name. For example, Robert P. Smith, Borrower.
- The full mailing address for each party. Remember to include the city or town, state, and zip code. If the Texas promissory note is secured, include the physical address for the borrower (and any co-signer) if it is different from the mailing address. Lenders often have a general mailing address and a payment processing address. The general contact mailing address for the lender should be listed here. The payment processing address should be listed within the repayment agreement.
- The principal amount of the loan. This is the amount provided by the lender without the interest.
- The interest rate charged per year. This is the interest rate charged yearly on the loan. It is listed as per annum, yearly interest rate, or annual percentage rate (APR).
- Payment agreement. The payment agreement is an important component of the Texas promissory note. It states how many total payments must be made, the amount of each payment, and the due date for each payment. The payment processing address should be provided in this section, too. If the lender uses a late fee, the amount of the late fee and when it is applied to the account should also be documented here.
If the Texas promissory note is secured, it must have an accurate description of the collateral that will be used to satisfy all or part of the loan if the borrower defaults. Without a description of the collateral, the lender may not be legally entitled to the collateral.
Following the main body of the Texas promissory note, clauses are used to create the terms and conditions. There are many different clauses that may be used. The most commonly inserted clauses are:
- Interest Due in the Event of Default. If the interest rate will be increased if the borrower defaults on the terms of the agreement, the higher interest rate is listed in this clause.
- Payment Allocation. An explanation of how the payments made are split between the principal balance and the interest.
- Prepayment. Whether a financial penalty will be imposed on the borrower if they pay off the loan early.
- Acceleration. The lender’s legal right to demand immediate and full repayment of the remaining balance if the borrower defaults.
- Attorney Fees and Costs. An explanation of how incurred attorney fees and costs will be handled if there is a dispute related to the Texas promissory note.
- Waiver of Presentments. A clause that states there is no legal requirement for the lender to be physically present when the borrower makes payments.
- Severability. If a portion of the Texas promissory note is found invalid, the remainder of the note is still enforced.
- Conflicting Terms. An explanation of how any existing conflicting terms will be clarified.
- Notice. Whether the borrower will be notified by the lender if the lender is filing a lawsuit for default.
- Governing Law. The state whose laws will be followed if there is a disagreement over the promissory note.
Texas promissory notes do not have to be notarized. However, to make them a legal document, they must be signed and dated by the borrower. If there is a co-signer, they should also sign and date the agreement.
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