Promissory Notes

A document most commonly used in commercial transactions that serves as a written promise, obligation for the borrower and security to the lender is called a promissory note. A promissory note is made and executed by the debtor, also called the maker,

who promises that the loan or amount borrowed will be paid at a future determinable time. A promissory note is widely used in domestic transactions but is not used in foreign or international trade.

A promissory note includes mostly the following: principal amount, maturity date,

interest rate, name and signature of maker, name and signature of lender, date it was made, and other specifications made and agreed by both parties. A promissory note needs not be notarized or signed by an attorney. However if the lender requires to,

then it may also be signed and notarized. The principal amount stated in the

promissory note should include all obligations of the borrower from the lender

including interest rates if there were any.

Maturity date should also be specified in the promissory note to know the extent of the lender in waiting for the loan to be paid. However there are promissory notes which do not have a maturity date; this is called as demand promissory notes. Demand promissory notes are kinds of promissory notes which are payable on demand or when the lender needs to. Usually a demand promissory note takes only days to be paid back. The date which the promissory note was made is also important on cases where the payment terms indicated is not the date but days. Example the payment term stated is 35 days after the note has been made or 60 days or 90 days.

A promissory note serves as a security for the loan. By signing on it, the maker promises to pay the amount loaned to the lender. The lender, by affixing his signature on it accepts the terms stated by the maker. The lender always gets the original copy of the promissory note. The lender keeps the promissory note for reference and as guarantee that the loan will be paid on the date stated therein. The original copy will only be returned to the borrower once the loan is repaid. Promissory note kinds of payments depend on the choices of the maker but are subject to approval of the lender. Usually the borrower discusses payment terms first with the lender, as a sign of asking approval, before making a promissory note. A promissory note can be repaid in many different ways. Equal monthly payments, yearly payments for those with large sum borrowings, lump sum payments, interest only payments and many more.

Promissory note is a very convenient tool for borrowers since they just need to sign it with less hassle and no need for collaterals. Whereas, its uses brings high risk to the lender, since they have no other recourse in cases of default.