Promissory Note
November 18, 2009 – 5:21 pmWhat is a promissory note?
What does a promissory note include?
What types of promissory notes are there?
Who can use a promissory note?
What do I need to consider when I use a promissory note form?
How is it different from an IOU?
What is a promissory note?
A promissory note is a written legal contract where one party makes a promise to the other party to pay a loan or debt back under specific terms.
What does a promissory note include?
A promissory note includes the name of two parties, the amount of the principal (loan or debt), the interest rate if any, the late fee if any, any additional costs, the schedule of repayment, the rights and obligations of the two parties, and the signatures of the borrower. Typically, the lender is not required to sign but may sign.
Some promissory notes include an acceleration clause which allows the lender to demand the entire amount of the note paid if the borrower misses a payment.
What types of promissory notes are there?
Promissory note on installment: This note requires the borrower to make equal payments in installments over a period of time until it’s fully paid.
Promissory note with balloon payments: This note requires the borrower to make equal payments of principal and interest with a final large payment, called a balloon payment to cover all the remaining amount of principal and interest.
Promissory note on demand: This note doesn’t have a maturity date of the note, and the payment is due when the lender demands.
Who can use a promissory note?
A promissory note is widely used by various entities. It’s used to document any type of personal loan between friends, family, or relatives. A promissory note is also commonly used for many professional types of loan in financing real estate transactions, in consolidating loan from banks or in funding capital to businesses.
What do I need to consider when I use a promissory note form?
- Interest: Be reasonable with interest rate - slightly lower than average commercial lenders’ interest and slightly higher than average interest rate of safe investments such as CDs or money market funds. Most jurisdictions consider highly unfair interest rate, so called usury, a criminal offense.
- Unsecured loan: Generally a promissory note is not secured. If the borrower declares bankruptcy, other secured creditors collect money first than the lender of the unsecured promissory note. Consult with a lawyer if the loan amount is significantly large.
How is it different from an IOU?
An IOU, “I owe you”, simply acknowledges one party owes a certain amount of money to the other party. A promissory note specify a promise to re-pay the loan or debt under specific terms as well as the amount of the loan or debt.