A promissory note is an essential tool for most large credit transactions. It is used in both business and consumer lending. Examples of consumer transactions involving a promissory note include student loans and home purchases. It is essential that a promissory note be drafted correctly so that the lender receives the advantages that it provides.
Promissory Note Definition
A promissory note is a special type of contract where a borrower makes an unconditional promise to pay a named party or a subsequent holder of the promissory note a certain amount of money by a certain date, often with interest. The law applicable to promissory notes is the Uniform Commercial Code as enacted in each state.
Parties to a Promissory Note
A promissory note involves at least two parties: the borrower and lender. A third party can become involved if the lender transfers or sells the note. The third party is called a holder because it now holds the note and has the right to receive payments from the borrower. A bank selling a home loan to another bank is an example. The bank that bought the note is now its holder and is entitled to the payments.
An enforceable promissory note must be in writing and signed by the borrower. It must be an unconditional promise to pay the principal with or without interest, must be payable to the lender or subsequent holder of the note, and must either specify the maturity date or state that it is payable on the demand of the lender or holder. Subject to some very narrow exceptions, the note must not require any other action by the borrower to do anything but make the payment.
A promissory note can be quite simple or can include a complex set of documents.
An example of a simple promissory note is:
I, John Doe, promise to pay to the order of Jane Roe or the holder of this note the sum of $1,000 plus interest thereon at an annual rate of 5 percent. This note shall be fully paid on Jan. 1, 2014.
/s/ John Doe
Consultation with a lawyer may be necessary for complicated or large dollar transactions.
Shawn M. Grimsley holds a bachelor's degree in political science, master's degree in public administration and a Juris Doctor. He practiced law for 10 years, focusing on general business law, securities law, real estate and civil litigation. Grimsley now serves as a teacher and writer.