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What is a Promissory Note?

2016-12-08T14:48:31+00:00

The term 'Promissory Note' is included in the Economics edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Promissory notes are negotiable instruments that are called notes payable in accounting circles. In such promissory notes, an issuer writes an unlimited promise that he or she will pay a certain amount of money to the payee. This can be set up either on demand of the payee, or at a pre arranged future point in time. Specific terms are always arranged for the repayment of the debt in the promissory note.

Promissory notes are somewhat like IOU’s and yet quite different. Unlike an IOU that only agrees that there is a debt in question, promissory notes are made up of a particular promise to pay the debt. In conversational vernacular, loan contract, loan agreement, or loan are often utilized in place of promissory note, even though such terms do not mean the same things legally. While a promissory note does provide proof of a loan in existence, it is not the loan contract. A loan contract instead has all of the conditions and terms of the particular loan arrangement within it.

Promissory notes contain a variety of term elements in them. Among these are the amount of principal, the rate of interest, the parties involved, the repayment terms, the date, and the date of maturity. From time to time, provisions may be included pertaining to the payee’s rights should the issuer default. These rights could include the ability to foreclose on the issuer’s assets.

A particular type of promissory note is a Demand Promissory note. This specific kind does not come with an exact date of maturity. Instead, it is due when the lender demands repayment. Generally, in these cases lenders only allow several days advance notice before the payment must be made.

Within the U.S., the Article 3 of the Uniform Commercial Code regulates most promissory notes. These negotiable forms of promissory notes are heavily used along with other documents in mortgages that involve financing purchases of real estate properties. When people make loans in between each other, the making and signing of promissory notes are commonly critical for the purposes of record keeping and paying taxes. Businesses also receive capital via the use of promissory notes that are sometimes referred to as commercial papers. These promissory notes became a finance source for the creditors of the firm receiving money.

Promissory notes have functioned like currency that proved to be privately issued in the past. Because of this, such promissory notes that are bearer negotiable have mostly been made illegal, since they represent an alternative to the officially sanctioned currency. Promissory notes go back to well before the 1500’s in Western Europe. Tradition claims that the very first one ever signed existed in Milan in 1325. Reference is made to some being issued between Barcelona and Genoa back in 1384, even though we no longer have the promissory notes themselves. The first one that we still have dates back to 1553 where Ginaldo Giovanni Battista Stroxxi issued one that he created in Medina del Campo, Spain against the city of Besancon.

The term 'Promissory Note' is included in the Economics edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.