Legal Definitions - unsecured note

An unsecured note is a type of promissory note that is not backed by any collateral. It is a written promise by one party (the maker) to pay money to another party (the payee) or to bearer. This means that if the maker fails to pay back the loan, the payee has no legal claim to any specific asset or property to recover the debt.

For example, if John borrows $10,000 from Jane and signs an unsecured note, he is not required to put up any collateral such as a car or a house. If John fails to repay the loan, Jane cannot seize any of his assets to recover the debt. Instead, she may have to take legal action to collect the debt.

Unsecured notes are riskier for lenders because they have no guarantee of recovering their money if the borrower defaults. As a result, unsecured notes usually have higher interest rates than secured notes, which are backed by collateral.

Other types of promissory notes include:

• Secured note: A note backed by a pledge of real or personal property as collateral.
• Demand note: A note payable whenever the creditor wants to be paid.
• Balloon note: A note requiring small periodic payments but a very large final payment.