A promissory note in the financing industry is a written promise to pay within a specified period of time. It details the promise made by the borrower to pay back the lender for a particular period of time, and both parties agreed to sign the document. At a glance, it may look like a contract, but it is totally different from a contract. Instead, it’s more of a common document in the financing industry. Other terms for a promissory note include a demand note, commercial paper, notes payable, and loan agreement.
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When is a promissory note needed?
A secured promissory note is necessary in cases like car loans, business loans, student loans, mortgages, and personal loans, such as when borrowing money from a friend or family member. A promissory note is all the more important when borrowing a huge amount of money as it will serve as a legal record of the loan, thereby protecting the borrower and the lender. There are different types of the promissory note, and the most common ones are the following:
- Commercial promissory note – It is a formal note that contains the details of a particular loan.
- Personal/informal promissory note –
- Investment promissory note – If the company wants to raise capital, they would issue an investment promissory note and sell the notes to other investors. It involves a friend or family member borrowing a sum of money from another friend or family member.
- A real estate promissory note involves a promissory note for a particular real estate purchase, such as a home loan.
Components of a promissory note
There are certain components a promissory note should have. If you are going to write a promissory note, it would be a big help if you are to take advantage of a promissory note template. It has the right format to ensure you will not miss a single detail such as the following:
- Borrower/payor – It contains the complete name of the person who promises to repay the debt.
- Lender/payee – It contains the name of the lender and the entity/person lending the money.
- Date – It specifies the exact date the borrower promises to repay the exact amount.
- Principal amount – It specifies the amount of borrowed money.
- Interest – A loan has a corresponding interest rate, and when repaying the principal amount, it should also include the total interest rate, which is in the form of simple interest or a compounded interest.
- First payment due date – The due date for the first payment is usually set on the first day of the month.
- Payment details – For multiple payment due dates, it should be stressed in the promissory note the amount of each payment and how often it should be made.
- Date the promissory note concludes – The date the promissory note ends is the last day of the payment. In the promissory note, there could be a balloon payment indicating the due date of the entire balance.
- Signature – It must contain the signature of the lender and the borrower. Without the signature of the concerned parties, the promissory note is not legal.
