Promissory Note

What is a promissory note?

A promissory note is a legally binding written agreement in which one party (the payer) agrees or promises to pay another party (the payee) a certain amount of money by a specified date. The document is similar to a loan contract, but it’s less formal and is commonly used when individuals lend money without the help of a bank. 

The document is just as legally binding as a formal loan agreement and includes information such as:

• The amount of money the payer borrowed
• Any interest charged on the loan
• The date the loan is due in full
• Any payment schedule that the payer will follow
• The method of payment 
• The signatures of the payer and payee

Promissory notes can be issued by individuals or financial institutions.

Promissory note FAQs 

What is an example of a promissory note?

Say you’re borrowing $5,000 from a family member to cover the cost of an unexpected medical bill. A promissory note for that loan could say something similar to this:

“I, [your full name], promise to repay [family member’s full name] the principal sum of $5,000 with an interest rate of 0% by [date payment is due] in monthly installments. The monthly installments will be paid on [your agreed-to day each month] in the amount of [$XXX.xx] by check.

Late payments will incur a fee of [X% or $X].”

The promissory note will be legally binding if both parties sign the agreement.

What happens if you don’t pay a promissory note?

The consequences of not paying a promissory note depend on the agreement you and the payee reach. However, failure to pay a promissory note could result in the lender taking you to court. Seek legal advice if you’re concerned about missing payments.

Does a promissory note need to be notarized?

No. Getting a promissory note notarized isn’t necessary. However, it can be a good idea to let an attorney review the note before signing. This ensures that the note is legally binding and protects both the lender and the borrower.

What are the main types of promissory notes?

There are several different types of promissory notes. This includes the following:

• Secured promissory note. A secured promissory note means the loan is backed by collateral. This is typically physical property that the lender can use to settle your debt.
• Unsecured promissory note. An unsecured promissory note is one that’s not backed by collateral. Both are legally valid and legally binding.
• Demand promissory note. A demand promissory note gives the lender the right to demand full repayment at any time, even if the note specifies a repayment schedule. 
• Master promissory note. A master promissory note is a promise to repay student loans issued by the U.S. Department of Education.