What Is a Promissory Note? Definition, Examples, and Uses

But actually, the signed mortgage promissory note represents a promise to repay the mortgage or loan, along with the repayment terms. Risks include penalties for missed payments, potential legal actions, and negative impacts on credit scores. It’s essential for note signees to monitor deadlines and consider their financial situation before signing any agreements.

Identify the Parties

In some cases (like for a mortgage loan), the note may also be held by a financial institution or investment group. Promissory notes are commonly used in business as a means of short-term financing. For example, when a company sells products but hasn’t yet collected payments, cash may run low, leaving the company unable to pay creditors. The company may ask creditors to accept a promissory note to be exchanged for cash after the company collects its accounts receivables.

• State-specific laws can greatly impact the enforceability and terms of a promissory note.
• At the same time, legal issues could arise for both the issuer and payee in the event of default.
• Sometimes, provisions are included concerning the payee’s rights in the event of a default, which may include foreclosure of the maker’s assets.
• The purchased property is typically used as collateral for this type of secured loan.

A promissory note is a legal, financial tool declared by a party, promising another party to pay the debt on a particular day. It is a written agreement signed by drawer with a promise to pay the money on a specific date or whenever demanded. To write a promissory note, start by writing down the agreement, being sure to include the amount of the loan, by when it needs to be repaid, and the interest you’ll charge. You should also include what will happen is a payment is missed or late, or if the person defaults on the loan.

Sample Promissory Note

A note signee must repay the full amount borrowed, provide accurate personal information, and adhere to the terms of the loan. Failure to meet these obligations can lead to legal consequences, including penalties or potential default on the loan. While promissory notes may be used in certain formal loans, they are commonly seen when friends, family, or acquaintances loan one another money.

While all three contracts spell out such terms, there are certain differences between a promissory note, a loan agreement, and an IOU. When John had not repaid the money by July, and avoided making a commitment to a payment arrangement, Mike filed a civil lawsuit. At the small claims court trial, Mike gives the promissory note drink coaster, with John’s signature on it, to the judge. The judge rules that the coaster is a valid contract, and that John must repay Mike the entire amount of the loan immediately. This type of promissory note does not allow the party lending the money to secure an asset for the loan. If the borrower does not make the payment, the lender must instead file in small claims court or go through other legal processes to enforce the note.

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When Alex discovers that the state usury law caps interest at 15%, they renegotiate the terms to avoid legal issues. A promissory note also describes the events that are considered a “default,” and the lender’s legal remedies if there is a default. For example, an event of default might be nonpayment for a particular amount of time, and the lender might be entitled to repossess the collateral. For instance, RocketLawyer offers free promissory note templates specific to your state and can customize the document based on the information you provide.

It includes extensive provisions about when and how the borrower will repay the loan and what sorts of penalties will be incurred if the borrower does not follow through with repayment. Loan agreements are usually used when large sums of money are involved, such as student loans, mortgages, car loans, and business loans. A promissory note, also known as an IOU, is essentially a one-sided document with which a borrower agrees to pay a lender back for money borrowed. Often, promissory notes are used in place of more formal loan agreements when the loan is being made informally between friends or family members. Promissory notes can even sometimes be used between very small businesses. A promissory note’s primary function is to serve as written evidence of the amount of the debt and the terms under which it will be repaid.

If the borrower defaults on its loan, the commercial lender is entitled to immediate payment of the full balance, not just the past due amount. In most cases, the lender on a commercial promissory note can place a lien on the borrower’s property until payment in full is received. A promissory note is a written and signed contract in which one party promises to pay a specified amount of money to the other party.

If all else fails, you can sue the borrower for the full amount of the debt. A loan promissory note sets out all the terms and details of the loan. Once all the provisions of the note have been filled out, the parties should print out the document and the borrower should sign and date it.

Example of Promissory Note Effecting Jury Ruling

• If the borrower fulfills their obligations, the lender can issue a promissory note release to formally acknowledge that the loan terms have been satisfied.
• Legal Templates cannot and does not provide legal advice or legal representation.
• The grandchildren paid on the note until 2005, when they suddenly stopped.
• Promissory notes and bills of exchange are governed by the 1930 Geneva Convention of Uniform Law on Bills of Exchange and Promissory Notes.
• These notes can carry investment risks and may need to be registered with state or federal agencies—like the Securities and Exchange Commission.

There are numerous ways in which a consumer protection attorney can help you, and many of them do not require anything from you. Our attorneys work hard to protect your consumer rights, and you can turn to us when you are facing a variety of legal challenges. In many cases, the defendant pays our fees, meaning many of our services are at no cost to the consumer. Contact our office today to see how our experience and our know-how can help you. We will evaluate your rights at no cost, and help you fight back if you have been harmed or treated unfairly by a company or business. Defaulting on a promissory note is a civil matter, which is dealt with in civil court.

If a promissory note borrower violates the terms of a valid promissory note, the lender may have the right to recover its money. Legal Templates LLC is not a lawyer, or a law firm and does not engage in the practice of law. Legal Templates cannot and does not provide legal advice or legal representation. Legaltemplates.net is owned and operated by Resume Technologies Limited, London with offices in London United Kingdom. On the other hand, non-negotiable promissory notes mean only the original lender can collect the debt, so there’s no risk of the borrower suddenly dealing with a different party.

For example, when you buy a house, the house is collateral on your mortgage. Your bank can seize your home if you do not make stipulated payments by way of a legal process. This note allows smaller payments initially, with a large lump-sum payment at the end of the loan term. “That’s often the problem—banks will typically finance you when you don’t need financing anymore, and they often don’t want to finance you when you need it! Promissory notes provide you with the opportunity to get your company to a point where you can access that bank financing,” Fontaine explains. The promissory note should essentially be used as short-term financing.

A breach of contract gives the promissory note lender all the legal means available to them to retrieve their money. The most common types of lenders using promissory notes are family, friends and angel investors. The most common type of promissory note is for a simple lump sum to be repaid by a certain date. With our document editor, you can customize repayment terms, interest rates, and more in minutes.