Is any one here using promissory notes as collateral for more financing?

I can't believe that a "promise to pay" would ever be considered as "collateral". Let them have some property to secure the loan, and you might find a lender who will consider that as collateral. Otherwise, you are seeking a "personal loan" or "personal line of credit".

Originally posted by wikipedia definition of collateral (finance)

In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.

http://en.wikipedia.org/wiki/Collateral_%28finance%29

Michael Lawrence

Real Estate Investor · Durham, North Carolina

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Jun 23 '11, 03:46 AM

http://www.ehow.com/how_5764863_use-promissory-collateral.html

http://en.wikipedia.org/wiki/Hypothecation

Jon Holdman

Real Estate Investor · Wheat Ridge, Colorado

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Jun 23 '11, 04:32 AM

Collateralized promissory notes (the ehow article) and hypothecation are the same thing. A loan is made and the borrower offers something of value - collateral - as security for the loan. If the borrower doesn't pay, the lender can take the collateral.

Rehypothecation is, I think, what you are wanting to do. In this case the lender uses the loan they have made as collateral for a second loan. That's a reasonable thing to do because a loan you make is an asset. That loan is generating a stream of payments.

So, the scenaro here is a borrower, A, gets a loan from a lender, B. A gives B a promissory note (note #1) and makes payments to B. Doesn't matter if this loan is collaterized or not, nor exactly how the payments work.

Now B takes this promissory note to a lender, C, and gets a loan. B offers note #1 as collateral. C agrees to make the loan, and B gives C note #2. If B doesn't make payment to C, C will take note #1 and start collecting the payments from A.

B and C would have to agree on the value for note #1. That's going to be very dependent on the strength of A and the collateral under note #1. If its a personal loan from B to A, the value might be only a tiny faction of the amount lent. If its a 20% LTV first mortgage the value might be almost the same as the amount lent.

Now, if you mean how could A use the loan from B as collateral for another loan, then, IMHO, A cannot. Note #1, which A gave B to get the loan, is not an asset for A. Its a liability.

What A could do is to use the cash received from the loan as (for example) a down payment and get another loan from another lender. If note #1 is using some property as collateral (for example), and A then gets another loan that uses the same property for collateral, the new loan is a second mortgage.

Jon Holdman, Flying Phoenix LLC

David C.

Hard Money Lender · Northridge, California

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Jun 23 '11, 04:34 AM

It's certainly legal, but not practical. You might be able to find an unsophisticated investor willing to take a note as collateral but generally real property is required. Even if real property is the collateral it's value will most likely have to be way more than the loan amount.

Marc Faulkner

Note Investor · Kalamazoo, Michigan

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Jun 23 '11, 02:47 PM

Actually some of the most sophisticated investors out there make loans against promissory notes secured by real estate all of the time.

Jon Holdman

Real Estate Investor · Wheat Ridge, Colorado

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Jun 23 '11, 02:56 PM

Makes sense. Its just a variation on "selling a note". For the lender, the note is an asset. It can be sold. If it can be sold, it can be used as collateral for a loan.

Jon Holdman, Flying Phoenix LLC