All About Promissory Notes

A promissory note is a document that represents one person’s agreement to pay another a specific amount of money, usually in reference to a loan. Promissory notes can be signed between two individuals, between two companies, between an individual and a company, or between a financial institution and an individual.

Typically, promissory notes are kept by the lender until the amount of money has been paid in full, at which time the payee has the right to retrieve the promissory note for his or her records. This, along with a written and signed receipt, should consider the debt paid in full.

Although a promissory note does not have to be notarized in order to be considered valid, it is sometimes a good thing to do to ensure the repayment of a loan.

Contents of a Promissory Note:

– Date when the note is created and signed
– Full legal names of both parties (or businesses)
– Address to which payment will be sent
– Interest rate if applicable
– Due dates for payments of both principle and interest
– Terms for pre-payment (penalties?)
– Assignment of late fees
– Signature of both borrower and loan officer

The terms of a promissory note can be made based on any number of factors, and the person who issued the loan does not have to be an exempt loan officer, such as a bank of credit union. Promissory notes could exist between parent and child; two friends; boss and employee; or any other relationship.

In some cases, usury laws will apply to promissory notes, which means that only a limited amount of interest can be charged to the payee on the principle of the loan. Most times, however, financial institutions are exempt from usury charges, so it is best to research your state’s laws on these matters.

If the loan is not paid in full at the time the promissory note dictates, the lender has the option of taking the other party to court. Promissory notes are just as legally binding as contracts in a court of law, and a civil or small claims court judge can render a judgment based on the sole evidence of a promissory note.

For more information about promissory notes, you can visit the Internet Legal Research Group website, or Nolo’s Legal Encyclopedia. To find examples of promissory notes and templates, you can go to LegalDocs or FindLegalForms. And remember that, before you sign a promissory note, you are agreeing to all of the terms listed in the note, and that you must fulfill your end of the bargain when it is time to pay.