Financing and Collateralization

When a party needs a loan to finance a purchase, the lender almost always requires the borrower to sign a promissory note as a condition of funding the loan. A promissory note is a signed contract containing a written promise by one party to pay another party a stated amount by a certain date (or sometimes, on demand).

There is a limit to the amount of interest a lender can charge under a promissory note. Such limits are set by usury laws, which are complex and have exceptions for loans relating to property, loans by a bank or similar institution, loans connected to consumer loans, and other situations. Violating usury laws could result in forfeiture of interest and, in some cases, voiding the entire promissory note itself. On the other hand, unless a promissory note provides for a specific interest, no interest can be charged because there is no automatic interest written into a promissory note.

“Collateral” is an asset a lender accepts as security for a loan. Collateral may take the form of real estate or other kinds of assets, depending on the purpose of the loan. The collateral acts as a form of protection for the lender. If the borrower defaults on loan payments, the lender can seize the collateral and sell it to recoup some or all its losses. Collateralization is the borrower providing a valuable asset to secure a loan against default.

Collins Law negotiates loan terms, drafts the documents necessary for the financing and collateralization of loans, and advises clients regarding loan documents drafted by potential lenders. Contact Collins Law for help with a promissory note or securing a loan with collateral.