Promissory notes are common legal documents issued during financial lending between family, friends, and sometimes businesses. They detail the agreement between the involved parties and the loan terms.
Let us look at promissory notes in detail.
There are two parties involved in the promissory note. They are Payee and the drawer.
The drawer is an individual who makes a written promise to pay the amount on a specific date or on demand by the drawee. The drawer is also referred to as the maker or promisor.
Drawee refers to the person to whom the promise has been made or the person in whose favor the promissory note has been drawn.
A payee is a third party who receives the payment. The payee and drawee can be the same person.
A promissory note sample consists of the following elements.
Some salient features of promissory note include -
Promissory notes can be classified into 4 types, namely:
Commercial promissory notes are a type of formal promissory note that is often issued by institutions such as credit unions and banks.
These promissory notes are often used by commercial lenders to make auto loans, personal loans, or business loans to private individuals.
An informal promissory note, or personal promissory note, is a written promise between two people for a loan that is not as formal or detailed as a commercial contract.
It typically comes into play when two individuals who know each other well and have a good relationship make an agreement to repay the money they owe in a certain period of time. The promissory note may not include all the details typical of more formal loans.
Real estate notes, like commercial notes, carry great risk in case the loan is not paid back in time. If the borrower defaults, the lender has the right to keep the property until the debt is cleared or sell it to recover the sum.
This type of loan is a little risky as all the important details become public, which can harm the borrower's credit history in the future.
An investment promissory note is a negotiable instrument that allows businesses to procure funds for their operations.
This document can be used by companies to raise capital, hold payment obligations and acquire commodities. The document also consists of all the terms and conditions agreed upon by both parties.
Note: Promissory notes can also be divided into secured and unsecured notes. In the case of a secured promissory note, the borrower must provide collateral to the lender to secure the amount. Unsecured notes do not require collaterals and are issued based on trust. Unsecured notes are very common among friends and family.
The main distinction between a bill of exchange and a promissory note is that the former is just a straightforward written promise between two parties. A bill of exchange, on the other hand, is a written agreement involving three parties.
The creditor issues a bill of exchange that requires the debtor to pay a specific sum within a specific amount of time. The promissory note, on the other hand, is a promise to pay a specific sum of money within a certain amount of time and is issued by the debtor.
A promissory note is a written promise by one party to pay the other party a specific sum of money.
It can be issued by businesses or individuals to confirm the terms of a loan and payment schedule, as well as proof of ownership of an item. Individuals looking to take a loan to finance their dreams without incurring high amounts of debt can rely on family or friends using promissory notes.
No. A promissory note is a legally binding agreement between the borrower and lender issued on the promise of repaying the loan.
Yes. Under Section 4 of the Negotiable Instruments Act, of 1881, a promissory note can be issued making it a legal instrument. The parties involved are bound by the law.
No. There is no limit to the amount that can be lent or borrowed using promissory notes.
The note will be held by the lender.
In case the borrower does not pay back the loan within the time specified in the promissory note, the lender has the right to file a civil suit to reclaim the money lent.
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