What is a promissory note?

Promissory notes are one of the many financial instruments available in the market. A promissory note is a written promise issued by a borrower to a lender stating that the borrower will pay the stated amount of money at a later date. The period for repayment may be definitive or at the lender’s demand.

How do you write a promissory note?

There is no fixed template for a promissory note; although there are certain items that the promissory note must necessarily contain. A promissory note must include the term ‘Promissory Note’ in the body of the note.

What does a promissory note contain?

A promissory note just like any other money lending instrument includes the principal amount, the interest rate, when (date) and where (place) the promissory note was issued, the date of maturity (when the loan has to be paid back), and the sign of the borrower and issuer. It also contains the terms of repayment or a repayment schedule. Moreover, the promissory note can also include whether the loan is secured (backed by property or equipment); as well as acceleration clauses.

Acceleration clauses are punitive clauses if payments are delayed. For example, if the lender fails to make timely payments, the debt may need to be paid in full.

How legal is a promissory note?

A promissory note is as legal and binding as any other debt instrument. However, it is less formal than a loan contract. Promissory notes do not mention recourse in the event of a violation of the agreement or borrower default. The benefit of a promissory note is that it can be issued by anyone – individuals as well as financial institutions.

What is the example of a promissory note?

An example of a promissory note is a banknote. Banknotes are issued by banks to raise finance and are negotiable, and payable on demand.

Is a promissory note negotiable?

Not all promissory notes are negotiable. However, often unconditional and saleable promissory notes become negotiable instruments. Negotiable promissory notes are widely traded across the globe and remain in high demand.

Is a handwritten promissory note legal?

Both handwritten and/or typed promissory notes are legal and admissible in court. A handwritten promissory note is equally binding and can be submitted in court in case of dispute.

Do promissory notes need to be registered?

Promissory notes with a term longer than 9 months must be registered with the Securities and Exchange Commission (SEC). Promissory notes that hold for less than 9 months are exempt from registration.

How do promissory notes work?

A borrower and a lender negotiate an amount of capital and the interest rate that the lender will charge. Both parties work out a payment schedule and the terms of maturity. Once all the terms are agreed upon, the promissory note is drafted and filled in. It must also be stated whether the loan is secured (backed by assets) or unsecured.

The lender and borrower sign the promissory note. If the promissory note is for a term longer than 9 months, it must be registered with the Securities and Exchange Commission (SEC). The promissory note is kept by the lender. Once the term has matured, and the debt has been paid back, the lender cancels the note and notifies the SEC.

Do promissory notes need to be notarized?

Generally, promissory notes do not need to be notarized.

Is a promissory note money?

Not all promissory notes are money. To be defined as money, an instrument must be widely acceptable, durable, portable, and in limited supply.

Promissory notes may or may not be negotiable, thus they are not always widely accepted. Moreover, since promissory notes have a fixed maturity, they cannot be claimed as durable. Finally, anyone can issue promissory notes anywhere, thus with no control over the supply of promissory notes, they are also not limited in supply. Thus overall, promissory notes do not fulfill most of the features of money. Thus, a promissory note is not money.

Can promissory notes be transferred from party to party?

If promissory notes are negotiable and saleable, they may be transferred from party to party. However, promissory notes may not always be tradable or transferable.

Who signs a promissory note?

The lender as well as the borrower, sign a promissory note and the lender gets to keep the note until repayment.

Do promissory notes have interest?

Yes, promissory notes have an agreed-upon interest rate that must be paid on the capital amount borrowed. The interest rate charged must be stated on the promissory note.

Who are the two parties to a promissory note?

The two parties to a promissory note are the lender and the buyer. The lender may be an individual or a financial institution. The borrower may be an individual or a business that needs financing.

Is a promissory note a security?

A promissory note may or may not be a security depending on its terms and whether it fulfills the requirements of a security. Generally, a security is a tradable financial instrument with a maturity of more than 9 months. Security is officially registered with the SEC. Thus, a non-tradable promissory note cannot be defined as a security. Similarly, promissory notes with a maturity of fewer than 9 months are also not required to be registered at the SEC and thus are not considered a security.