Loan Notes and Terminology

Here are some helpful definitions of loan and note terminology:

What is a note? A note is a contract between two or more people or a legal entity that puts into writing an agreement to borrow and lend money. The note generally includes an amount, an interest rate, the date the loan starts, the date the loan is due, and how payments will be made. Some notes are interest only, some include principal and interest, and others include a portion of the interest and principal payments (these are sometimes called balloon payment notes.

A fully amortized note (Principal and Interest Note) lets the borrower pay equal monthly payments for the life of the loan. The final payment is approximately the same as the first payment.

An interest only note (Interest Only Note) allows the borrower to pay interest only on the note for the full term. At the loans maturity all the principal and any remaining interest are then due.

A loan with a final balloon payment (Principal and Interest Note with Balloon Payment) provides the borrower the option of paying less than the principal plus interest that is due. In these notes the interest accrues and the accrued interest plus the principal are all due at the maturity of the note.

A loan that is due at maturity (Principal and Interest Due at Maturity Note) allows the borrower to not make any payments until the loan maturity date. Interest and principal are due on the maturity date specified in the note.

A loan “matures” on the day it is finally due. Maturity refers to the day the loan must be paid off, the final due date.

What is the Borrower’s capacity to pay? If you loan someone money, make sure they have the capacity to pay you back. Make a payment schedule that fits within their current income and expenses. Adjust the note document to make it work.

A Family and Friend Loan. ZimpleMoney believes that the best borrowers are the ones you know and trust. Family and friend loans are good example of loaning money to people you know and trust. If you don’t trust someone, family or friend, don’t lend them money. If they do not have a job, it probably unlikely that you’ll get your money back. Be smart, keep your agreements formal and your relationship professional.

Making a loan to your family to buy a house, a car, or pay for a wedding are some ways family and friends can help one another “Capitalize Life’s Passions.”

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