Promissory note

Promissory notes say how and when a borrower has to pay her debts. Bankrate explains.

What is a promissory note?

A promissory note is a written promise that one party will pay the other party by a specified time. As long as it’s signed by both parties, a promissory note can be as simple as jotting down some words on paper. Promissory notes are different from contracts in that contracts spell out all the terms of a legal agreement while promissory notes only cover when, how, and how much someone is paid.

Deeper definition

Promissory notes are frequently used for different kinds of loans, like a mortgage or an auto loan. While the contract between borrower and lender will state the services offered in exchange for meeting your obligations, a lender may separately ask you to sign a promissory note declaring when you’ll pay them. Lenders may introduce promissory notes in court if they sue you for a debt you owe to them.

Promissory notes include the names of both parties and their signatures, the amount of the loan and its interest rate, and the term of the loan. If collateral is used, that may be stated as well. Whether used in a mortgage or a business agreement, it merely explains the process for payment; it does not give the borrower legal right to the services or property outlined in the contract he has with the lender. Student loans are also governed by promissory notes.

In one sense, a promissory note is not much different than an IOU. If you borrow money from your grandma, you might agree to pay her back via a promissory note. A check is a kind of promissory note. Money itself is a promissory note, with its face value representing the amount owed to you, although it can no longer be exchanged for anything other than more currency.

You may be asked to sign a promissory note for any personal loans you have. Get a good rate on a personal loan with Bankrate’s comparison sheet.

Promissory note example

Caydenn asks Caeyla for a thousand bucks to pay for a new camera. Caeyla gives him a promissory note saying that Caydenn must pay her back within 30 days or he’ll be charged a 20% late fee. After Caydenn signs it, the promissory note becomes a legal instrument, and if Caydenn doesn’t repay Caeyla, she can sue him.

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