Promissory Notes FAQ

What is a promissory note?

A promissory note is a written promise from the “maker” or “issuer” to the “payee” that a certain amount of money will be paid from issuer to payee in the future. Though there is no requirement to write a date at which the payment will happen in a promissory note, it is a common provision of these notes. Additionally, promissory notes will often contain information on the interest of the debt. As for payment: there are a number of payment methods that can take place with the written notification of a promissory note.

Also known as “notes” or “notes payable,” these one-way “contracts” are considered enforceable under law and as such can be used as negotiable instruments.

How are promissory notes different than IOUs?

Because an IOU is similarly a written document acknowledging that a debt exists, many people confuse IOUs with promissory notes. The difference is that IOUs are simply a written affirmation that the debt exists; promissory notes also acknowledge this debt exists but go a step further in promising the payment of that debt. The promissory note can then be further modified to indicate the method and timing through which the payment(s) will be made.

Why might I want to use a promissory note?

Because a promissory note, once signed, can be enforceable by law and considered a “negotiable instrument,” a promissory note is essentially a way to put debt on paper and use it for that value. This is valuable, for example, in the world of mortgage payments and real estate because of the debts incurred through those transactions. It is also useful in business loans.

What are the payment options for debt in a promissory note?

These different types of payment methods do not have to be signed by the other party – the payee – but the possession of such a promissory note does imply a de facto agreement between the two parties.

Here’s a quick look at the different types of payment methods seen in the writing of promissory notes:

• Balloon payment: If you imagine the payments of your promissory note are frequent but relatively small until a specific point, at which the payments suddenly increase, this could be considered a balloon payment. It gets its name because the payments eventually swell up like a balloon, often due to the presence of compound interest that is accruing over time.
• Installments: Paying flat installments on a debt that has been incurred is a good way to ensure that you’re paying back stable, predictable rates both on interest (which helps prevent ballooning) and overall.
• On Demand: This type of payment is exactly what it sounds like: payment must be rendered “On Demand” when the lender has requested the payment. Though this is not a common way for people to pay off the debt on their promissory notes (many opt for installments, as is the case in many car loans and mortgage loans), it is still a potential way for the lender to enforce its collections.
• Term: At the end of the payment term, a Term payment will then require that the issuer pay the remaining principal and interest in full. The date of this term will be outlined in the promissory note.

What kinds of promissory notes are there?

Although the essence of a promissory note remains the same, there are a few variations that allow for certain agreements and transactions to take place between individuals and businesses. These variations allow for a greater deal of flexibility in their business interactions.

• Line of credit: Establishing a line of credit between two people through a promissory note is a common way to ensure that monthly payments, for example, are binding. This helps ensure that the person issuing the credit will be able to mitigate their financial risk and be assured of prompt payment.
• With a Guarantor: Because extending credit or loans to certain parties can be financially risky, a promissory note with a guarantor can be used in order to make sure that the payment is guaranteed by the third party. This will mean both the debtor and the third party are accountable for the debt in the promissory note.
• Secured: Secured promissory notes are used when the debtor puts up property to help ensure the security of the loan taking place. Secured promissory notes are frequently used by banks, for example, and can easily be modified to ensure different payment options.

When is a promissory note enforceable?

Provided that a promissory note was signed lawfully and with full mental capacity by the issuer, promissory notes are enforceable upon their signing. The individual payment terms present in the promissory note, of course, also help ensure protection from a lender so that payments are not unlawfully solicited ahead of time. All enforcement, of course, will be dependent on the payment type – for example, an On Demand promissory note payment system will not offer those same protections to the issuer.

What are the requirements for promissory notes to be valid?

Much like any contract, a promissory note must have a number of requirements fulfilled to be considered valid. They must be made by legal adults, for example. One particular issue in the validity of promissory notes is Consideration. Many contracts between two people are not considered valid without proper consideration – or some sort of equal exchange – between two parties. Similarly, a promissory note must be founded on a lawful transaction.

When is a promissory note effective?

Typically, a promissory note is effective upon its signing. Because promissory notes lay out the own terms for the payment of debt, much of the enforceability of payment relies on how these terms are established in the promissory note. The different methods of paying off debts listed in promissory notes helps establish its effective dates, as well as when payments are to be made. But essentially a promissory note is effective from its signing until the debt has been paid off in the manner described in the note.

Promissory Notes

• Promissory Notes Combo Packages

  Popular Promissory Notes Combo Packages which contain the most frequently used promissory notes. These forms include a Bills of Sale Combo and a Promissory Notes Combo Package which includes a multitude of promissory notes, as well as other related forms.

• Promissory Note - Balloon Payment

  Popular! Installment Promissory Note with Final Balloon Payment. This promissory note requires equal monthly payments but differs because it includes a large final payment which will include all remaining principal and interest due on the promissory note.

• Promissory Note - Installment

  Popular - Promissory Note (Installment) form which allows the borrower to repay the loan in equal monthly installments. This promissory note sets out the amount of interest, monthly payment and time period in which the note must be paid in full.

• Promissory Note - On Demand

  Popular! Promissory Note - On Demand which allows the note holder to demand payment at any time. This note sets out the original amount of the loan, its term and that the note can be repaid at any time without incurring a prepayment penalty.

• Promissory Note - Term

  Popular! Promissory Note--Term which requires that principal and any remaining interest on a promissory note be paid on a certain date. This form sets out the principal amount, repayment schedule, interest rate and remedies in the event of default.

• Vehicle Bill of Sale and Promissory Note

  Popular - Vehicle Bill of Sale with Promissory Note is used when selling a vehicle to a buyer who will make monthly payments under a promissory note. This form includes a detailed description of the vehicle (make, model and VIN), an Odometer Disclosure Statement and the terms of the promissory note.

• Demands for Payment

  Demands for Payment for use when demanding that payment be made on a debt. Included are demands for payment of promissory notes, initial and second requests for overdue payment and a final demand for payment letter.

• Guaranty

  Guaranty forms specifically designed to be used when entering into a loan or repayment arrangement. Included are a general guaranty in which another party agrees to make payments under a loan in the event of default and a security agreement in which a deposit account is pledged as collateral for a loan.

• Notices for Promissory Notes

  Notices for Promissory Notes for use when giving notice that provisions of a promissory note are in default. This form sets out the amount of the note, amount in default and lender's remedies in the event the default is not cured.

• Promissory Note - Agreement to Modify

  Agreement to Modify Promissory Note which will effectively modify the terms of an existing promissory note. This attorney-prepared form sets out the names of the borrower and lender and the specific provisions to be modified. Take advantage of an attorney's expertise for a fraction of the cost when you purchase this agreement.

• Promissory Note - Line of Credit

  Promissory Note - Line of Credit between a borrower and lender who extends a line of credit to lender in exchange for monthly payments. This attorney-prepared Promissory Note will accompany and become a part of a Line of Credit Agreement. Take advantage of an attorney's expertise at a fraction of the cost when you purchase this form.

• Promissory Note - Secured (Installment)

  Promissory Note - Secured (Installment) for use when making a loan secured by property and paid in monthly installments. Carefully drafted by our attorneys, this note will set out the terms of this type of installment arrangement, including the type of security. This form can easily be tailored to fit your unique lending needs. Protect your rights for a fraction of the cost when you purchase this form.

• Promissory Note - Secured (Multiple Options)

  This Promissory Note (Secured with Multiple Options) was prepared by an experienced attorney. This form allows you to make a loan secured by property and contains a choice of three repayment options. It also contains easy to understand instructions and can be tailored to meet your individual needs.

• Promissory Note - Secured (On Demand)

  This Promissory Note - Secured (On Demand) packet gives you all the tools and model forms you will need to tailor a promissory note allowing for a loan to be secured by collateral or property. Prepared by experienced attorneys to ensure compliance with the law, this packet makes it easy to protect yourself and your assets while saving you time, money and headaches.

• Promissory Note - Secured (Term)

  This Promissory Note - Secured (Term) packet gives you all the tools and model forms you will need to tailor a promissory note allowing for a loan to be secured by collateral or property. Expertly prepared by attorneys to ensure compliance with the law, this packet makes it easy to protect yourself and your assets while saving you time, money and headaches.

• Promissory Note - with Guarantor

  Promissory Note with Guarantor when you need a promissory note which contains installment payments and is guaranteed by another party. This attorney-prepared form sets forth the borrower's obligation to repay the debt and can easily be tailored to fit your unique needs. Take advantage of an attorney's expertise at a fraction of the cost!

• Release of Promissory Note

  This attorney-prepared Release of Promissory Note Kit is specifically designed for a release that is based on something other than payment in full of the underlying note. This Kit includes easy to understand instructions, allowing you to tailor the release to your unique situation in compliance with governing law. Available to download immediately.

• Spanish Promissory Notes

  Promissory Note with Installment Payments containing both English and Spanish translations. This attorney-prepared form contains the necessary provisions for this type of note and can easily be tailored to fit your situation. Take advantage of an attorney's expertise for a fraction of the cost!