How to tackle a secured promissory note with amortized payments

If you are planning to create a secured promissory note that provides for periodic payments, you will need to determine the correct periodic payment amount. You should also create a payment schedule to keep track of the interest paid and the reduction of principal.

Secured promissory note basics

A promissory note is a legal document that obligates a borrower to repay a loan to a lender, and sets forth how the loan is to be repaid. A note is a secured promissory note if the repayment is secured by property of the borrower. If the lender fails to repay the loan, the property, called collateral, can be taken by the lender.

A secured promissory note that limits the lender to taking the collateral if the borrower fails to pay is called a nonrecourse, or no recourse, secured promissory note. A note that does not include such a limitation is a secured promissory note and a personal guarantee of the borrower, which allows the lender to sue the borrower if the property is not of sufficient value to cover the loan balance.

There are three primary ways in which a promissory note can be paid:

• Lump sum payment. Under this scheme, there are no installment payments of either principal or interest. The full amount is due on a certain date, or upon the occurrence of a certain event, as specified in the note. The event can even be at any time the lender demands payment.
• Installment payments. This is when payments are made on a periodic basis, most often monthly. Each payment consists of principal and interest, calculated so that the loan is paid in full with the last payment. These are also called amortized payments.
• Balloon payment. This is a hybrid of installment payments and a lump sum payment. Installment payments are made, but a sizable amount, or the full amount, of the loan principal remains due at the end of the loan period. There may be periodic payments of principal and interest, but they are insufficient to pay off the loan by the due date. Or, there may be periodic payments of interest only, with the full amount of principal due at the end of the loan term.

Amortized payments

With a fully amortized loan, the periodic payment will be sufficient to pay off the loan with the last payment. For a balloon payment loan, the periodic payment will be sufficient to pay the loan down to the designated lump sum due at the end of the loan term.

The amount of the amortized loan payment will be determined by four factors:

• The principal amount to be paid
• The interest rate
• The period of each payment (monthly, weekly, etc.)
• The total number of payments

Secured promissory note installment payments will be partly interest and partly principal. With each payment, the amount that constitutes interest will decrease, and the amount that constitutes a reduction in principal will increase. Therefore, the first payment will be mostly interest, and the last payment will be mostly principal.

Promissory note and amortization schedule templates

A schedule for secured promissory note amortized payments can be created from various online calculators. You fill in the principal amount, interest rate, payment frequency, and total number of payments. The calculator will then produce a payment schedule. For each payment, such a schedule will indicate the payment amount, the amount allocated to interest, the amount allocated to the reduction of principal, and the principal balance after the payment.

A secured promissory note form that provides for amortized payments also can be completed by utilizing the services of an online service provider.