If you've taken out a loan for home improvements, your education, or a car, you were probably asked to sign a "Promise to Pay Agreement." You might not have realized it at the time, but this is a contractual and legal obligation between you and the lender. Understanding these deals, or "promissory notes," can keep you out of trouble.
Promise to Pay Agreements can take four forms. In a simple note, one lump sum settles the loan balance. This is typically the case with payday loans. An installment note is the most common form. It calls for monthly, quarterly, or yearly payments against the loan balance until it is paid off. Most loans fall into this category, including student loans, car notes, and mortgages. The third is the open-ended revolving note. This is a line of credit arranged between the borrower and the lender. The least common type is the demand note. It's all to the advantage of the lender since he can demand payment in full at any time.
Terms and Conditions
No contract is complete without a set of basic terms and conditions. They're part of the paperwork that includes the names of the borrower and lender, the total loan, the dates and amounts of the payments, and any interest rates or administrative fees. All of that information combined makes the promissory note a legally binding contract as soon as both sides sign the deal.
Missing a Payment
Missing a Promise to Pay Agreement payment can be dangerous for the borrower. Many notes have acceleration clause; miss one payment, and the entire amount is due immediately. If you object to such a cause, don't hold your peace while the deal is being done. Some deals call for penalties and fees for missed payments. As of 2012, those fees were in the $20 to $30 range. They're compounded into the loan balance along with the interest you already owe, which means you'll pay more in the long run.
Understanding Your Rights
Let's say you aren't happy with the billing procedures of your lender. You do have some options thanks to the Federal Truth in Lending Act from 1968. If you're convinced you fully understand the contract, and still think the lender has done something unethical or unfair, you can file a complaint directly to its manager or with the Federal Deposit Insurance Corporation (FDIC). The first step is to file a grievance with the company's administrative offices. If that doesn't work, you may need to pursue legal action.
Jeremy Bradley works in the fields of educational consultancy and business administration. He holds a Master of Business Administration degree.