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What is a Promissory Note?

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  • Originally Written By: Michael Pollick
  • Revised By: Bott
  • Edited By: Niki Foster
  • Last Modified Date: 29 November 2014
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A promissory note, often shortened to 'note', is a legally binding document that states the specific details of a loan transaction and is usually read and signed by people borrowing from most commercial lenders. The note should provide specific details on the amount of the original loan, known as the principal, the loan repayment schedule, and any applicable interest rate; it is not unusual for a promissory note to also contain details regarding any grace periods or penalties for defaulting. Although either party may draw up a promissory note, it's usually in the best interest of the lender to make sure all of the important elements are included. Once both parties sign a note, the precise terms of that contract are the ones that will be enforced during any future legal proceedings.

Notes Versus IOUs

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A promissory note is not the same as an informal "I Owe You" (IOU) because a personal IOU is not always considered a legal document, even if it has a notary seal of approval. While an IOU may acknowledge that a debt exists, the specific repayment details may not be included, as opposed to specific and detailed promissory notes. Commercial lending companies almost always require borrowers to read and sign a very detailed note before a loan can be deposited or processed; the borrower should hold onto this note until the loan becomes due, as it typically contains important information about interest rates and the total amount of principal to be repaid. IOUs are not often viewed as important or valid as notes because they do not usually contain enough details regarding the financial transaction.

A common example of a note being used often occurs when someone buys a new car; many times, a person does not have the thousands of dollars necessary to purchase the car, so a car loan is secured with a lender. Before any exchange of money can take place, the lender will usually request the specific repayment terms to be spelled out in writing and signed by both parties; this document would be considered a promissory note and is legally binding. No matter where the borrower goes or what the borrower does with the money, the lender can prove the existence of the original loan.

Legality Issues

The production of a properly worded and signed promissory note is usually enough to prevail in any legal proceeding against the borrower, but there are some exceptions. If the borrower can prove he or she signed the document under extreme duress, meaning under undue pressure from the lender, then a judge may rule the note unenforceable. For a promissory note to be considered legally binding, the borrower must sign a completed document; placing a signature at the bottom of a blank page is not considered binding. Promissory notes should not contain conditions which would be considered illegal elsewhere, such as an impossibly high interest rate or additional penalties not spelled out in writing.

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Discuss this Article

anon281971
Post 14

Is a promissory note enforceable if the lending business broke the regulating laws when making the loan?

anon238217
Post 13

What if you have a IOU and paid it back? You also had the person sign they received the money in full. The person gets mad at you decides to take you to small claims court to collect the IOU again. Is it possible to collect again if they signed he received the money?

jenindi75
Post 11

Are promissory notes between husband and wife legally binding in Florida? I am lending my husband a sizable amount of money from my own money and I feel the need to protect this money for repayment.

anon82130
Post 10

what if a promissory note was drawn up and signed but the debtor filed for bankruptcy and it was discharged, is the note still valid or collectible?

anon75064
Post 8

is a promissory note valid if the amount is not stated on the notarized page?

anon72055
Post 7

what if your husband signed a promissory note to his mother and you did not sign and knew nothing about it and now you are getting a divorce.

anon47753
Post 6

when the promissory note wsa singned only by one party (by the promisee) is the note still vaild?

anon12524
Post 5

what if a promissory note was drawn up and signed but the debtor filed for bankruptcy and it was discharged is the note still valid or collectable?

cunningham
Post 4

What if a promissory note was signed between partners for a personal loan, but a portion of the loan was used as funeral expenses for a loved one? Now that this loved one has passed away, and has an executor, the persons who signed the original loan note is trying to get the executor of this loved one to pay for the loan? An executor was not appointed until 2008, the loved one died in 2002. The executor never signed to promissory note. I don't know where to start. (a real estate lawyer has been obtained)

anon11890
Post 3

What's the difference between a "promissory note" and an "indenture" in relation to a municipal bond issuance?

harleydavid
Post 2

now what about if you signed a promissory note and the other person didn't sign and now the person is deceased but there is an estate, do I still owe this person's estate even though there is only one signature on it and it doesn't even have penalties no interest rate and it only states that i promise to pay x amount of dollars a month until paid in full it was actually a thank you letter but worded wrong.

anon219
Post 1

I recently read that promissory notes are only legally binding for a specific amount of time. What, if anything, determines the valid timeframe? What if the promissory note doesn't include a maturity date?

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