Promissory Notes vs. Guaranties
Promissory notes are a promise to pay -- usually some type of loan. When you take out a student loan or buy a stereo system through a finance company, you sign a promissory note. That note (usually in the fine print) outlines the contractual terms of the agreement.
As a student, history lessons are fresh in your mind (I’m sure) and you’ll recall that once upon a time people made transactions in real time. That means when they bought something, they gave something in exchange for what they were getting. This barter system originally involved the exchange of goods but once people started using money and buying goods that they couldn't pay for immediately, they began signing pieces of paper that promised to pay the debt. The “I owe you” (IOU) was one of the earliest forms of promissory notes.
The earliest IOUs were literally just pieces of paper that listed the amount owed and the signature (or mark in the case of illiteracy) of the person owing the money. The key difference between IOUs and promissory notes was that an IOU simply acknowledged the existence of a debt; it usually made no provisions for paying it back.
In accounting terms, this is known as a note payable, and is usually (if properly executed) a contract that lays out the terms and conditions for the repayment of a debt. A well-structured promissory note should describe in detail everything involved in the repayment. Beyond the basic provisions of a contract, a promissory note includes the following information regarding the debt: 1. The principal amount of the debt, 2. The amount and term of interest charged on the debt, 3. The schedule of payments, including dates, amounts, and late charges, 4. A description of any collateral used to guarantee the debt, and 5. The consequences if the debt is not repaid as specified in the promissory note
Loan Guaranty
In a contract, a guaranty is given as security for the loan. Frequent usages of this provision include loans that require a co-signer and loans that are guaranteed by an outside entity, such as a private party, insurance company, or the government. (If you have one, your guaranteed student loan is one example of a loan that is backed by the government.)
The guaranty is simply a promise where one person agrees to assume the responsibility of payment of another person's debts or obligations. The most common reason for a lender to require a guaranty is when the borrower has either a bad credit history or no credit history.
The Small Business Administration (SBA) helps small business owners who would otherwise not be able to qualify for a loan secure the funding they need. With an SBA loan, the government guaranties a percentage (such as 80 percent) of the loan, thus substantially lowering the risk to the lender.
A personal guaranty involves a third party using their assets to guaranty the loan in the event that the borrower does not fulfill the promise to repay the loan as specified in the loan contract. Assets that can be used to secure a guaranty include: 1. Cash deposits or insurance, 2. Real estate equity, 3. Stocks, bonds, and other securities, or 4. Other valuables such as paintings, jewelry, coin collections, antiques, classic cars.
Hopefully, your investment in your education will pay off and you’ll never find yourself in the position of having to find a guarantor for your loans.
