Promissory Notes

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.  

Who Are Involved In The Promissory Note?

There are two parties involved in the promissory note. They are Payee and the drawer.

Drawer/Maker:

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:

Drawee refers to the person to whom the promise has been made or the person in whose favor the promissory note has been drawn.

Payee:

A payee is a third party who receives the payment. The payee and drawee can be the same person.

What Does A Promissory Note Contain?

A promissory note sample consists of the following elements. 

• Names of all parties involved in the transaction
• Address and contact details of the payee and maker
• Principal debt
• Date of issuance
• Maturity date 
• Interest rate
• The total amount after adding interest
• Repayment terms and schedule
• If the note is secured, then the collateral involved
• Signatures of the parties involved

Features Of Promissory Note

Some salient features of promissory note include -

1. A promissory note must be in writing. An oral agreement is not accepted as a promissory note. 
2. Breaching the terms of the promissory note can lead to legal repercussions and disciplinary consequences.
3. In all cases, the promise to pay a specific amount of money must be absolute. A conditional guarantee is not accepted in such notes.
4. The note contains all of the required information, such as the names of the drawer, and payee, the date of issue, maturity date, repayment terms, signatures, principal amount, interest rate, and more.
5. The note must include the particular amount that is borrowed and not an approximate value. 
6. Promissory notes are valid for three years from the date of issuance.
7. When a person issues a promissory note, he or she must stamp it in accordance with the Indian Stamp Act, and a revenue stamp is typically affixed to the note signed by the promissory. You can use a Re 1/- revenue stamp and have the borrower cross-sign it.
8. Once signed, the terms of the agreement do not change.

Types Of Promissory Notes

Promissory notes can be classified into 4 types, namely:

Commercial Note

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.

Personal Promissory Note

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 Promissory Note

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. 

Investment Promissory Note

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.

What Is The Difference Between a Promissory Note And a Bill Of Exchange?

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.

Conclusion

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.