There are many ways to outline the debt that you owe someone. In day-to-day life, if you’re borrowing money from a friend, then the most common way to signal that you’re indebted to them is by using a verbal agreement, but this is relatively hard to prove, which is why it isn’t used for larger sums of money.
In most cases, when you’re borrowing a large sum of money, a promissory note will be used to outline the details of the arrangement and the debt that you hold.
In this article, we’ll cover what you should know about promissory notes, breaking down exactly what they contain and when they’re used.
What is a Promissory Note?
The term “promissory note” comes from the fact that the note outlines a promise made from one party to another. The party issuing the note is the one who is taking on the debt and receiving the money at the beginning of the arrangement while the party receiving the note is the payee.
A promissory note outlines that a specified sum of money will be paid back either at a certain date or when the payee requests that it’s paid back. In the vast majority of cases, promissory notes come in the former form because it allows for the issuer to get the money back in time to pay back the payee.
Promissory notes also contain all of the details of the arrangement, including the amount that was given to the issuer and also the interest rate that they will be liable for. Other details include the maturity date of the agreement, when and where the promissory note was issued, as well as the signature of the issuer.
Keep in mind that you may have to sign a promissory note when you’re borrowing a relatively small sum from a financial institution, but this usually isn’t the case. Promissory notes apply to debts that you’ve gotten from sources that aren’t a bank, and these notes can be issued by either an individual or a company.
In most cases, the payee will be another individual that is willing to take on the note. This means that a promissory note simplifies the process of being a money lender, even if you aren’t explicitly in that business. The note essentially acts as evidence of the agreement that exists between the two parties.
The promise that forms the core of a promissory note is also unconditional, meaning that it is as stipulated in the contract, free of any extraneous conditions. While a promissory note is more legally enforceable than a verbal agreement or an IOU, they aren’t quite as legally rigid as a loan contract.
The key difference between a promissory note and a loan contract is that a promissory note typically doesn’t contain a recourse if the issuer doesn’t pay. On the other hand, a rigid loan contract may specify that the lender’s house may be foreclosed if they don’t follow the terms of the arrangement.
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