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To be enforceable, a promissory note must include the amount of the loan, the date by which it is to be paid, the interest rate and a record of any collateral that is being used to secure the loan. If a promissory note is properly supported by consideration, executed (signed) by the borrower and contains the required language, it is generally binding. Consideration can be in the form of money, services or other value.
The promissory note should also include an explanation of what happens if the borrower defaults on a payment or does not timely pay off the loan. If a borrower is able to pay off the entire loan in a timely manner, he or she would not be considered in default. Once a borrower
does default on making payments as originally agreed upon, the creditor, in accordance with the terms of the note, may have several options in collecting the debt owed. Creditors may send reminder letters, charge late fees, add accrued interest to the new balance, or double the amount owed for the following month. The next steps would be for the creditor to contact the debtor directly, turn the matter over to an internal collections department or an external collection agency (whose actions are regulated by federal laws, such as The Fair Debt Collection
Practices Act and similar state laws), and finally, litigation. Under certain circumstances, both internal collections departments and external collection agencies may report the borrower’s credit information to a credit reporting bureau or agency, which may in turn impact the borrower’s credit. Generally, accurate negative information will remain in a consumer’s credit report for seven years.