Loan Note

Updated on March 19, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Loan Note?

A loan note is an instrument issued by the lender to the borrower when the one-time grants loan to the latter. It also contains the payment terms and conditions, such as the interest rate, tenure, amount of fine, in case of default, etc.

Loan-Note

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In other words, a loan note contains all the legal bindings and obligations of both a lender and a borrower. Thus, it is a kind of agreement that clearly outlines the penalties and the procedure to be followed if one party fails to meet the agreement’s terms and conditions.  It is usually used for heavy purchases and has tax benefits for the borrower.

Key Takeaways

  1. All of the legal agreements and responsibilities of a lender and a borrower are contained in a loan note.
  2.  A promissory note is frequently utilized when a loan is for a smaller sum because it is less formal than a loan note.
  3. The loan note is a particular tool that aids the lender in acting, recovering, and claiming a refund of the loan amount.
  4. Compared to a promissory note, this note has a greater interest rate. As a result, when a loan is obtained through a loan note, the borrower must pay a higher sum.

Loan Note Explained

A loan note instrument is issued when the loan amount is comparatively higher, and it is known as a secured mode of issuance of the loan. As a result, the lender receives a higher interest rate and a higher return on investment. While unlike unsecured loansUnsecured LoansAn unsecured loan is a loan extended without the need for any collateral. It is supported by a borrower’s strong creditworthiness and economic stabilityread more, the loan note bears a higher amount of security as the borrower’s credit profile is comparatively better than the other modes of lending. Mortgage-Backed lending ensures the amount of security attached to this note.

During a sanctioning of a loan, both parties must be aware of the principal amount, payment terms, and the rate of interest attached to it. To remove all future discrepancies, it is an essential means where a lender and a borrower can refer to the terms mentioned earlier and conditions. Thus, both parties can settle their queries. A proper loan note template provides evidence to both the parties depicting the terms and contract of the loan taken for a particular product or service by the borrower. First, the lender inspects the borrower’s credit profile, followed by the mortgageMortgageA mortgage loan is an agreement that gives the lender the right to forfeit the mortgaged property or assets in case of failure to repay the borrowed sum and interest.read more, income tax details, etc.

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How To Write?

It is a formal loan note agreement between the lender and the borrower, and both the parties sign an agreement consisting of the followings:

  1. Amount of the loan
  2. Details of the mortgage such as price, depreciation, etc.
  3. The interest of the loan
  4. Fine or penalty attached to the loan
  5. Tenure of the loan followed by the amount of interest attached to it.

The above are the various details given in a proper loan note instrument.

Example

Let us take the example of Max, who urgently needs a loan to buy a property. He approaches John, a successful businessman, and wants to borrow $300,000. John agrees to give Max the entire amount but asks for a loan note, which will have all the terms and conditions related to the loan and will safeguard John in case of any problem.
Thus, the document is made, that contains all the information like total loan amount, interest rate, payment terms, any fine or penalty in case the parties break the conditions, etc. Therefore, it is a legally binding contract for both of them.

Advantages

Disadvantages

  • A loan note is much more stringent than a promissory note and involves a larger amount than the promissory note. Thus, the borrower cannot escape without the repayment of the loan.
  • In the case of the promissory note, the lender gives a discount during the loan payment at the stipulated date. While in the case of a loan note guarantee, the borrower is deemed to pay the principal amount and the interest attached to it.
  • The borrower is deemed to repay the entire amount, and in case of delay, a percentage of interest is charged on the remaining amount. While in the case of the promissory note, the model is unsecured. Thus, if the borrower gets bankrupt, the lender can claim the proportionate amount, which can be realized only by selling the remaining assets of the borrower.
  • The rate of interest attached to this note is comparatively higher than a promissory note. Thus, the borrower has to pay a higher amount when a loan is taken through a loan note.
  • A borrower needs a good credit rating if he wishes to obtain a loan note, while in case of default, the lender can go to court and file a lawsuit against the borrower.

Loan Note Vs Promissory Note

Frequently Asked Questions (FAQs)

Are loan notes equity or debt?

A loan note is a financial instrument that serves as evidence of a debt between the issuer, often known as the borrower, and one or more lenders.

On loan notes, do you pay taxes?

Whether loan notes are structured as qualifying corporate bonds (QCBs) or non-qualifying corporate bonds determines how they are taxed (non-QCBs).

Can a business issue loan notes?

Both businesses and private individuals may issue loan notes for various reasons.

What is a redeemable loan note?

A loan note that can be converted into company stock is called a “convertible.”

Recommended Articles

This has been a guide to what is Loan Note. We explain its differences with promissory note, along with examples, how to write, advantages and disadvantages. You may learn more about financing from the following articles –

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