What Is an Open Ended Promissory Note?

A promissory note is a contract to repay borrowed money. According to the University of Minnesota Extension, the four types of promissory notes are the simple note, demand note, installment note and open-ended note.

Definition

The open-ended promissory note, also called a revolving note, allows the borrower to set up a line of credit with the lender in the amount specified in the promissory note.

How It Works

With a line of credit, the borrower can take draws (also called advances) up to the maximum amount specified by the promissory note. As the borrower repays the note, he can make additional draws, as long as he doesn't exceed the limit on the line of credit.

Advantage

An open-ended note gives the borrower more flexibility than other notes do for using borrowed money.

Other Notes

A simple note means that you repay the loan in one lump sum at the end of the note. A demand note lets the lender demand repayment at any time. An installment note sets up periodic payments of principal and interest on the loan.

Considerations

According to the University of Minnesota Extension, all notes need to specify interest rate, repayment schedule, conditions of default, costs of collection, prepayment provisions, and acceleration clause (which specifies that the lender can demand the borrower pay the loan in full if he does not make the required payment), and if the loan is secured or unsecured.

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