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What is a note?
A note, also known as a promissory note, is a legal debt instrument where one party makes a promise in writing to pay a certain amount of money to another party under certain terms.
The promissory note contains all the terms that pertain to the indebtedness that the issuer sets, such as the amount owed, maturity date, interest rate, date and place of issuance, as well as the signature of the issuer.
In the case of a loan, the lending party may be entitled to interest on the amount owed up to that time when the loan is fully repaid.
Notes come in various forms and under various names based on the industry involved. For instance, in accounting, a note is referred to as a “note payable.” These notes are common in most jurisdictions as financial instruments and are used mainly by short-time financing companies.
Based on the 1930 international convention that regulates bills of exchange and promissory notes, the body of the instrument must contain the term “promissory note” and an unconditional promise to pay.
While a promissory note provides a specific promise to pay, an IOU simply acknowledges the existence of debt.
On the other hand, a loan contract normally stipulates the right to recourse for the lender — a provision that does not exist in a promissory note.
Example of a note
The most common type of note is the personal promissory notes. These document a personal loan from a family member or friend. When it comes to commercial lenders like banks, commercial promissory notes come into play. They are similar to personal promissory notes, though much stricter. Any default will force the commercial lender to act immediately to ensure repayment of the balance. This may include a lien on the property of the borrower to fulfill the payments.
The other type of note that attracts the same default consequences is a real estate promissory note. In the case of a default with this type of note, a lien will be placed on the property.
Finally, there are investment promissory notes that usually are used in a business setting. Here, the promissory notes are used to raise business capital. In most cases, this comes in the form of security interest and falls under the regulation of securities law. They often contain clauses on the return of investment over a given period.
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