Promissory Note

A financial instrument that contains a written promise by one party to pay

another party a definite sum of money either on demand or at a specified future
date. A promissory note typically contains all the terms pertaining to the
indebtedness by the issuer or maker to the note's payee, such as the amount,
interest rate, maturity date, date and place of issuance, and issuer's signature.
The 1930 international convention that governs promissory notes and bills of
exchange also stipulates that the term promissory note should be inserted in
the body of the instrument and should contain an unconditional promise to pay.

Promissory notes lie somewhere between the informality of an IOU and the
rigidity of a loan contract in terms of their legal enforceability. An IOU merely
acknowledges that a debt exists, but does not include a specific promise to pay,
as is the case with a promissory note. A loan contract, on the other hand,
usually states the lenders right to recourse such as foreclosure in the event
of default by the borrower; such provisions are generally absent in a promissory
note.

Promissory notes that are unconditional and saleable become negotiable
instruments that are extensively used in business transactions in numerous
countries.

A promissory note is usually held by the payee. Once the debt has been
discharged, it must be canceled by the payee and returned to the issuer.
A promissory note is a legal instrument (more particularly, a financial
instrument), in which one party (the maker or issuer) promises in writing to pay
a determinate sum of money to the other (the payee), either at a fixed or
determinable future time or on demand of the payee, under specific terms. If
the promissory note is unconditional and readily salable, it is called a negotiable
instrument.
Referred to as a note payable in accounting (as distinguished from accounts
payable), or commonly as just a "note", it is internationally defined by the
Convention providing a uniform law for bills of exchange and promissory notes,
although regional variations exist. Bank note is frequently referred to as a
promissory note: a promissory note made by a bank and payable to bearer on
demand. Mortgage notes are another prominent example.
Written, signed, unconditional, and unsecured promise by one party (the maker
or promisor) to another (the payee or promisee) that commits the maker to pay
a specified sum on demand, or on a fixed or a determinable date. Promissory
notes (such as bank or currency notes) are negotiable instruments.

Overview

Promissory note is a written promise to pay a debt. It is a financial instrument,
in which one party (maker or issuer) promises in writing to pay a determinate
sum of money to the other (the payee), either at a fixed, determinable future
time or on demand of the payee subject to specific terms.

Thus, a promissory note generally means a signed document containing a
written promise to pay a stated sum to a specified person or the bearer at a
specified date or on demand. A promissory note can be either payable on
demand or at a specific time. If the promissory note is unconditional and readily
salable, it is called a negotiable instrument.

The terms of a note usually include the principal amount, the interest rate (if
any), the parties, date, terms of repayment (which could include interest) and
the maturity date. Sometimes, provisions are included concerning the payee's
rights in the event of a default, which may include foreclosure of the maker's
assets.

Secured & unsecured
A promissory note is of two types secured and unsecured promissory note. An
unsecured promissory note is not attached to anything, the loan is made based
on the maker's ability to repay. A secured promissory note may also be made
based on the maker's ability to repay, but it is secured by a thing of value such
as a car or a house.

If your home is used for security and you default on the promissory note, you
could lose your home. Most promissory notes attached to property are secured
by either a trust deed, also known as a deed of trust, a mortgage or a land
contract, and those instruments are recorded in the public records. Promissory
notes are often unrecorded.






Promissory notes vs IOU
Promissory notes differ from IOUs in that they contain a specific promise to pay,
rather than simply acknowledging that a debt exists.

Terms, such as "loan", "loan agreement", and "loan contract" may be used
interchangeably with "promissory note" but these terms do not have the same
legal meaning.

Promissory notes are evidence of a loan but they are not the same as loan
agreements. In fact, the loan agreement is legally distinct from any promissory
notes associated therewith. The loan agreement contains all of the terms and
conditions of the loan contract.

Requisites of a promissory note:
(a) The document must contain an unconditional undertaking to pay;
(b) The undertaking must be to pay money only;
(c) The money to be paid must be certain;
(d) It must be payable to or to the order of a certain person or to bearer;
(e) The document must be signed by the maker.