Guidelines for Selling an Unsecured Promissory Note

Updated October 16, 2023
12 min read
Guidelines for Selling an Unsecured Promissory Note


An unsecured promissory note is essentially a written promise to pay back a loan made by a borrower to a lender. But here's the twist — this kind of note doesn't require any form of collateral. What does that mean? Well, it gives more flexibility for borrowers who may not have assets to put up as security. As for the lender, it can open up opportunities for investment decisions with a bit of an entrepreneurial flare.

Selling unsecured promissory notes can be a nifty way to get your invested money back and maybe even make a bit of profit. Sounds complicated? It's not as hard as you think! Throughout this article, we'll break it down for you, shedding light on why you might want to consider selling this type of promissory note, along with a step-by-step guide on how to do it.

What Is an Unsecured Promissory Note?

An unsecured promissory note is a legal document between a borrower and a lender. Unsecured means the loan does not have collateral tied to it. Thus, if the borrower defaults, the lender's course of action would be through legal means — not by seizing assets. This instrument indicates a promise from the borrower to repay a certain amount of money to the lender under agreed terms.

Now, let's get to the crux of the matter: selling an unsecured promissory note. Promissory notes offer a chance for lenders to receive initial investment faster instead of waiting for payments over time.

Why Use an Unsecured Promissory Note?

The unsecured promissory note, a staple of U.S. business and personal finance, serves as a financial instrument for a vast range of purposes. Essentially, it's a promise; a borrower commits to repay a certain amount of money to a lender under specified terms, and all this sans collateral.

This makes these instruments incredibly flexible and accessible for a varied range of transactions. For instance, a small business looking to secure a loan for expansion but without substantial assets for collateral could turn to an unsecured promissory note.

A significant advantage of an unsecured promissory note from a U.S. law perspective lies in the strict mandate for clear terms and conditions. This transparency is evidenced in the Truth in Lending Act (TILA), which requires lenders to disclose the terms of their loans clearly, including this type of promissory note. 

An engaging example concerns TILA's application in a court case, Williams v. Walker-Thomas Furniture Co., where the court ruled that full disclosure of credit terms is essential. This transparency allows the borrower a certain level of security since the terms can't be changed midway, and the lender can't make unjustified demands beyond the agreed terms. Thus, despite the absence of collateral, the unsecured promissory note can serve as a borrower-friendly financial tool.

Pros and cons of an unsecured promissory note

The allure of an unsecured promissory note stems largely from its flexibility and accessibility. Undeniably, the most significant plus of unsecured promissory notes lies in the absolution from the risk of asset forfeiture. For borrowers with limited assets, this can be an invaluable aspect.

For example, start-ups and small businesses often lean towards unsecured promissory notes because they may not possess substantial tangible assets to serve as collateral. In the realm of personal finance, individuals may opt for unsecured promissory notes to avoid tying personal assets to the debt. Also, these promissory notes tend to have a faster application and approval process since there's no need for asset valuation.

However, the comfort offered by an unsecured promissory note comes with its fair share of drawbacks. Since there's no collateral as security, lenders often step up interest rates to offset the additional risk they're undertaking. 

Thus, unsecured promissory notes can end up being costlier for the borrower in the long haul. Moreover, if the borrower fails to pay as per the agreed terms, the lender has no immediate collateral to seize. Instead, the lender will have to get into the process of filing a lawsuit to recover the loan amount, which can prove to be time-consuming and ensnared with potential legal complexities.

Secured vs. Unsecured Promissory Notes

A primary difference you'll find in a secured versus an unsecured promissory note lies in the element of collateral. A secured promissory note requires the borrower to offer up an asset as collateral. This could be a house, car, or other valuable belongings agreed upon at the initiation of the loan. Secured notes can often be found in real estate transactions, where the property itself serves as collateral. You can look into real estate templates for more information.

Secured promissory notes:
  • Requires a valuable asset as collateral.
  • Lower risk for the lender.
  • Lower interest rates due to reduced risk.
  • The lender has the right to take the collateral if the borrower defaults.
Unsecured promissory notes:
  • Doesn't require collateral.
  • Higher risk for the lender.
  • Higher interest rates to compensate for the heightened risk.
  • If the borrower defaults, the lender resorts to legal action to recover money.

Despite the difference in the presence of collateral, both types are legally binding and proof of debt. It's important to carefully consider the terms and implications before entering into an unsecured promissory note. A good centralized resource for related information is Lawrina, a reliable legaltech ecosystem.

When To Use an Unsecured Promissory Note?

An unsecured promissory note is typically the go-to choice when undertaking a monetary transaction with someone who has proven creditworthiness. For instance, a lender might be more comfortable issuing a promissory note to a borrower bearing a high credit score or a strong history of timely loan repayments.

It's an underlying assurance that the borrower will stand good on their promise to pay, thus building the lender's confidence. It's also savvy to employ unsecured promissory notes for short-term loans where the repayment is expected in a relatively condensed time frame.

In a more personal context, an unsecured promissory note can often serve as the perfect tool for transactions among close acquaintances, family members, or friends. When a trust level already exists independently of the financial arrangement, collateral isn't viewed as a necessity, thus paving the way for this type of promissory note. 

It provides explicit terms and conditions, clearly outlining when and how the borrowed money is to be paid back, and spares the lender from awkward conversations later on. Thus, an unsecured promissory note can facilitate smoother interpersonal lending and foster goodwill between both parties involved.

How To Make an Unsecured Promissory Note?

Creating an unsecured promissory note, despite its legal intricacies, can be manageable with a little guidance. Initially, a good starting point could be a promissory note agreement template. Templates often come formatted with all the necessary sections and a standard language suitable for most transactions.

An unsecured promissory note must clearly outline:

  1. The principal amount: The loan's total sum, devoid of any interest.

  2. The interest rate: This should be specified as per the agreed terms between the lender and the borrower.

  3. Repayment schedule: Whether it’s to be settled in a lump sum or in installments.

  4. Default terms: It's crucial to specify the actions that will be taken if the borrower fails to meet the agreed payments.

Despite the initial ease of using a template of unsecured promissory notes, the involvement of an experienced attorney is advisable. Especially when dealing with larger sums of money, the terms can get knotty. A lawyer, particularly with a background in family and personal law, should be involved to verify the document for compliance with local and state laws, as well as to ensure that the lender is adequately protected in the agreement.

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How To Sell Unsecured Promissory Note?

Selling an unsecured promissory note is relatively straightforward, but there are a few steps you need to be aware of. Here's a simplified guide:

  • Establish the value: The first step would be to establish the value of your unsecured promissory note. This involves calculating the remaining principal and interest to be paid. 

  • Find a buyer: You would then need to find a buyer — someone interested in taking over the rights to your unsecured promissory note. This could be a note buyer, investment firm, or even a private investor. Online platforms or local investment networks might be decent places to start.

  • Due diligence: Any potential buyer of your unsecured promissory note will likely request some time to conduct their own due diligence. This can include verifying the remaining balance of the note, examining the borrower's payment history, and evaluating the borrower's credit profile.

  • Prepare the sale agreement: Once a buyer is found, you will need to prepare a sale agreement. Primarily, this document transfers the rights of the unsecured promissory note from you to the buyer. It is crucial that this document clearly enumerates the terms of the deal; you don’t want any grey area here! Legal counsel could be worth the investment at this stage.

  • Complete the sale: Finish up by getting the sale agreement notarized and filing it appropriately. Especially for this finale, it's a good idea to check up on local or state laws — you don’t want to miss any obligatory filings or documents!

It's essential to remember that selling an unsecured promissory note is a legal transaction, and you should consider seeking legal advice to avoid any pitfalls in the process.


Lending money always sounds like risky business, but an unsecured promissory note can be the buoy that keeps you afloat amidst financial uncertainties. The intrinsic flexibility and simplicity of a promissory note make it a viable option for a wide range of financial interactions. If you're a lender seeking a quick return on your investment, selling a promissory note might be right up your alley.

Moreover, the unsecured promissory note serves as more than just a financial mechanism; it's a way to help prop up someone in need without making the process overly complex or risky. From a small business owner building a dream to someone navigating life's unexpected financial turbulence, your note can become their lifeline. Utilizing legal aids and resources can simplify the process, ensuring both parties experience a well-structured and secure transaction.

Frequently Asked Questions

Are unsecured promissory notes legally binding?

Yes, unsecured promissory notes are legally binding. As long as it contains the basic elements such as the amount borrowed, the interest rate, due dates for repayments, and it's signed by the parties involved, a promissory note is enforceable by law.


However, it's important to remember that with an unsecured promissory note, if the borrower defaults, the lender's legal recourse differs noticeably compared to a secured promissory note. Rather than claiming an asset, the lender would need to undertake legal proceedings to recover the money. Despite this, the promissory note provides a legitimate, recordable agreement between parties, which can be crucial.


What happens if a borrower defaults on an unsecured promissory note?

When a borrower fails to keep up the agreed payments, it's considered a default on the unsecured promissory note. Considering there's no collateral associated, legal action remains the main recourse for the lender to recover the outstanding debt. It's essential to spell out these terms of default in the note to set clear expectations for both parties at the outset.


For instance, the note may state that in case of default, the entire loan comes due immediately. Alternatively, it can provide a grace period for the borrower to rectify the situation. While an unsecured promissory note does mean fewer straightforward options in the event of a default, it still holds legal value and protections for the lender.


Can an unsecured promissory note be sold?

Yes, an unsecured promissory note can be sold. When a note is sold, the buyer (new lender) steps into the shoes of the original lender, and the borrower will now owe the debt to the new lender. This is a common practice in lending and can be an effective way of quickly recouping your investment.


It is important to note that selling an unsecured promissory note does not change the terms of the note for the borrower. The interest rate, payment schedule, and other key terms will remain the same. Both parties should document such transactions accurately and transparently to maintain the credibility and legality of the promissory note.