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What Is a Promissory Note?

When a person wishes to borrow money or some form of property, the lender may wish to place all the terms and conditions on paper. This agreement will then be signed by both parties just like they would sign some form of contract. This is referred to as a promissory note, and mostly details the repayment scheme.

A promissory note is considered to be legally binding and an official document reflecting the agreement made by the parties who entered into the agreement. The purpose of a promissory note is to provide a record of a loan in the event that there may arise a dispute or an issue. The existence of a loan is easier to prove if a promissory note exists.

Also known colloquially as a note, a promissory note provides the specific details of the original loan. This is referred to as a principal. The note also includes the repayment scheme and whatever interest rate is applied or agreed to. Details regarding a grace period or whatever penalties or fines that may be incurred due to a default in payment or possible default may also be included in a promissory note. Thus, there is no general or standard format for a promissory note, only that it pertains to an existence of a loan.

A promissory note is a more formal and legally binding version of the informal IOU note. An IOU note acknowledges the existence of a debt, but does not necessarily provide the details with regards to repayment schemes or other rates and values.

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