What Is A Promissory Note?

Last Updated: 15 Oct 2024

All of us know what does the term ‘loan or debt’ mean. A loan is a debt evidenced by an agreement which specifies, among other things, the principal amount, interest rate and date of repayment.

In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same amount. The below write-up provides details about a promissory note.

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Overview

Promissory note is a written promise to pay a debt. It is a financial instrument, in which one party (maker or issuer) promises in writing to pay a determinate sum of money to the other (the payee), either at a fixed, determinable future time or on demand of the payee subject to specific terms.

Thus, a promissory note generally means a signed document containing a written promise to pay a stated sum to a specified person or the bearer at a specified date or on demand. A promissory note can be either payable on demand or at a specific time. If the promissory note is unconditional and readily salable, it is called a negotiable instrument.

The terms of a note usually include the principal amount, the interest rate (if any), the parties, date, terms of repayment (which could include interest) and the maturity date. Sometimes, provisions are included concerning the payee’s rights in the event of a default, which may include foreclosure of the maker’s assets.

Secured & unsecured

A promissory note is of two types secured and unsecured promissory note. An unsecured promissory note is not attached to anything, the loan is made based on the maker’s ability to repay. A secured promissory note may also be made based on the maker’s ability to repay, but it is secured by a thing of value such as a car or a house.

If your home is used for security and you default on the promissory note, you could lose your home. Most promissory notes attached to property are secured by either a trust deed, also known as a deed of trust, a mortgage or a land contract, and those instruments are recorded in the public records. Promissory notes are often unrecorded.

Promissory notes vs IOU

Promissory notes differ from IOUs in that they contain a specific promise to pay, rather than simply acknowledging that a debt exists.

Terms, such as “loan”, “loan agreement”, and “loan contract” may be used interchangeably with “promissory note” but these terms do not have the same legal meaning.

Promissory notes are evidence of a loan but they are not the same as loan agreements. In fact, the loan agreement is legally distinct from any promissory notes associated therewith. The loan agreement contains all of the terms and conditions of the loan contract.

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Requisities of a promissory note:

• The document must contain an unconditional undertaking to pay;
• The undertaking must be to pay money only;
• The money to be paid must be certain;
• It must be payable to or to the order of a certain person or to bearer;
• The document must be signed by the maker.