Understanding Promissory Notes

In private lending, the deed of trust gets all the attention — it's the recorded one, the public one, the one this site talks about constantly. But the deed of trust secures something, and that something is the promissory note. The note is the debt itself: the signed, enforceable promise to repay a specific amount on specific terms. If the lien is the collateral, the note is the contract. A lender who has never read one carefully is trusting that someone else did.

What every note must contain

• —The parties: who owes (the maker) and who is owed (the payee — you or your entity, spelled exactly right).
• —The principal: the amount actually lent, matching what your wire says you sent.
• —The interest rate: fixed or variable, and how it's calculated — annual rate, applied monthly, on what balance.
• —The payment terms: amount, due date, where and how payments are made.
• —The maturity date: when the remaining balance comes due, and how principal is returned.
• —Default provisions: what constitutes default, cure periods, late charges, and what remedies follow.
• —The security reference: the clause tying this note to the recorded deed of trust or mortgage on the specific property.

None of this is boilerplate to skim. Each line answers a question you will care intensely about exactly once — usually at the worst possible moment. The time to find a missing maturity date or a vague default clause is before funding, when fixing it costs a redraft instead of a lawsuit.

Interest mechanics, precisely

A '12% note' can mean several different cash flows, and the note should make yours unambiguous. Interest-only: you receive 1% of principal monthly ($420 on $42,000) and the full principal returns at maturity — the common structure for 12–36 month private notes, and the simplest to verify. Amortizing: each payment includes principal, so the balance declines and the final payoff is smaller. The note should also state the day-count convention and what happens to partial payments. If you can't reproduce your expected monthly payment from the note's own language with a calculator, ask for clearer language. A good operator will not be offended; precision protects both sides.

Default, remedies, and the order of operations

The default section is the note's emergency manual. It should define default objectively (a payment N days late, failure to maintain insurance, unauthorized transfer of the property), give cure mechanics (notice to the borrower, a window to catch up), and state remedies: acceleration — the right to declare the entire balance due — and enforcement against the collateral through the recorded lien. Michigan's foreclosure-by-advertisement process makes that enforcement path efficient for properly drafted instruments. In practice, remember the operational reality beneath the legal one: nearly all defaults resolve through workout, because everyone's economics favor resumption over enforcement. But you hold the paper for the minority of cases where they don't.

The lien is your parachute. The note is the manual that says when you may pull the cord.

Personal guarantees, entities, and who actually owes you

Read the signature block as carefully as the numbers. If the maker is an LLC, the LLC owes you — and an LLC's promise is worth its assets, which is why the recorded lien on real property matters more than the letterhead. Some lenders negotiate a personal guarantee from the operator's principal, adding a second source of repayment. Reasonable deals exist with and without one; what matters is knowing which you have. On your side of the table, take title as your entity if you invest through one, and confirm the note, the lien, and the insurance all name the same party — mismatches are the most common paperwork defect in private lending, and the easiest to fix on day one.

Notes are property: assignment and transfer

A promissory note is an asset you own, not a subscription you hold. It can be sold, assigned, or inherited; performing notes trade in a real secondary market, typically at prices keyed to yield and collateral quality. If you ever sell, the buyer takes the note by endorsement and records an assignment of the lien, stepping into your position. You likely won't — most private lenders hold to maturity — but understanding that the paper is transferable property clarifies what you actually bought: not a relationship, not a promise, but an instrument with independent value.

A reading checklist for the five minutes before you fund

• —Does the principal match what you're wiring, to the dollar?
• —Can you compute your monthly payment from the stated rate and terms?
• —Is the maturity date explicit, and is the payoff mechanism described?
• —Does the default section define late, notice, cure, and acceleration?
• —Does the security clause reference the exact property and the lien being recorded?
• —Do the names on note, lien, and insurance match — including your entity's exact spelling?

Six questions, five minutes, and you've done more diligence than most private lenders ever do. The note is short. Read all of it. It's the only document in the package written specifically to you.