A California promissory note offers security and structure to loan agreements. It is a written agreement between a borrower and a lender that, once properly executed, proves the existence of a loan.
The contract addresses details about the loan, such as late fees, interest rates, term length, and repayment method. Once both parties sign the promissory note, the lender can begin to collect payment from the borrower.
The California Civil Code regulates California promissory notes. According to this code, if the amount of the loan is more than $500, or if the borrower will take longer than a year to repay it (independent of the amount), a promissory note must be drafted.
There are two types of California promissory notes: secured and unsecured.
California Secured Promissory Note
A secured promissory note offers the lender the most significant security, as the borrower must provide some form of collateral. The lender can collect this collateral as payment if the borrower defaults on all or part of the loan.
Most financial institutions require secured loans.
California Unsecured Promissory Note
An unsecured promissory note offers a lesser degree of security. If a borrower defaults on the loan, the lender can file a civil lawsuit. However, due to the lack of collateral, they may be unable to recover the entirety of the loan.
This type of loan is typically for those with outstanding credit or high net worth. It is also preferred by individuals with a high degree of trust in their relationship (close friends, family, etc.).