Unsecured Note: Difference between revisions

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Unsecured Note
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Unsecured notes are loans without collateral (such collateral is for example guarantee, cession of receivables, mortgage, pledge or deposit). As such, an unsecured note would be eligible for repayment after the liquidation. Their repayment depends on interest on the loan. Interest is a fixed fee that must be paid, otherwise the company must be forced to liquidate.

Unsecured notes are issued at nominal value (the price at the time of issue, not the current market value).

Together with debentures and convertible notes make up the issue of securities (A. Mills, W. Woodford, p. 35).

Unsecured Promissory Note

A promissory note is a note signed by the debtor, who promises to pay the claimant the amount of money within a specified period. Signed promissory note is a confirmation by the debtor in writing that he is owed a certain amount of money. This makes it difficult for the debtor to question fees or services rendered (C. Frischer, p. 125).

An unsecured promissory note is a legal document that documents the promise of a future payment. It's best to use this document in the case of memorializing simple business or personal loans.

It doesn't give the lender rights and power, which gives him a secured promissory note (K. Thomas, p. 209). However, taking an unsecured note is better than none (C. Frischer, p. 125).

Determinants of unsecured loans

Factors determining participation in the unsecured loans market are, among others:

  • age;
  • income;
  • positive financial prospects;
  • housing tenure.

Regressions explaining the level of borrowing of individuals suggest that income is the main variable explaining cross-sectional differences in unsecured debts.

The increase in aggregate unsecured debt doesn't seem to be closely related to changes in the debt market conditions and was mainly related to larger amounts borrowed by indebted persons. Income growth, better educational qualifications and better financial outlook have contributed to this result. Most of the overall increase in unsecured debt is not explained by variables at the individual level, but is due to common, unmodified macroeconomic factors (A. Del-Rio, G. Young).

References

Author: Katarzyna Sieczkowska