Last Updated September 20, 2023
What is a Promissory Note?
A Promissory Note is a legally binding written promise to repay borrowed money. This document is typically used by non-traditional lenders, like individuals and corporations, when entering into loans with borrowers.
In Canada, the Bills of Exchange Act governs Promissory Notes and sets out the essential elements and requirements for a valid agreement.
Promissory Notes are also known as:
- IOU
- Notes payable
- Demand note
- Commercial paper
How does a Promissory Note work?
Promissory Notes document financial transactions between two parties. Unlike an IOU that only records a loan amount, a Promissory Note details the consequences of failing to repay the loan.
After finalizing the terms and conditions of a loan, the lender will issue a Promissory Note. To be considered legally valid, it must include:
- Loan terms
- The accepted interest rate
- The lender’s and borrower’s signatures
The borrower will then review and sign the document, thus making the Promissory Note legally binding and enforceable. Depending on the agreement, the lender may wish to have the document signed before a witness or notary public.
Crucially, Promissory Notes are negotiable instruments. This term means the loan can be transferred from one individual to another.
Types of Promissory Notes
LawDepot’s Promissory Note template allows you to create two types of Promissory Notes:
- Simple Promissory Notes outline the basic terms of a loan, such as the principal amount borrowed, interest rate, repayment schedule, and due date.
- Demand Promissory Notes include basic terms but do not specify a fixed repayment day. With this type of Note, the funds are due when the lender demands payment. The borrower must pay within a specific timeframe, usually outlined in the Promissory Note.
Benefits of a Promissory Note
1. Clarity
When lending money, relying on a verbal agreement is not enough. A simple Promissory Note clarifies a loan's terms and conditions, saving both parties from future disputes and misunderstandings. Having the original loan amount, interest rate, and repayment schedule in writing ensures that the finer details of the financial agreement are crystal clear for both the borrower and the lender.
2. Enforceability
In case of a dispute or non-payment, a Promissory Note can be used as evidence in any legal proceeding to enforce the borrower's obligation to repay the debt. It makes it easier for the lender to seek remedies such as obtaining a judgment or pursuing collateral.
When should I use a Promissory Note?
You can customize LawDepot’s Promissory Note template to suit a variety of financial agreements, including:
- Business loans, such as capital for a startup business
- Vehicle loans for cars, boats, or other motor vehicles
- Real estate loans, such as a down payment on a home
- Debts or bills, such as credit card debt
- Other miscellaneous loans, including student loans, familial loans, or investment loans
What does a Promissory Note include?
LawDepot’s Promissory Note template is highly customizable and can be altered to fit the specific terms of your agreement. A Promissory Note can include:
- Purpose of loan
- Original loan amount
- Applicable interest rates
- Loan date
- Repayment details, including applicable payment schedules
- Payment dates, including first and final payment dates
- Options for early repayment or lump sum payments
- Late payment penalties
- Lender details, including full name and address
- Borrower details, including full name and address
- Details of any co-signers
- Collateral details
- Witness or notary details
- Any additional information the parties choose to include
Promissory Note versus Loan Agreement
Both Promissory Notes and Loan Agreements are contracts between a borrower and a lender that specify the terms and conditions of a loan. But, it is essential to remember a couple of notable differences between these two documents.
| Promissory Note |
Loan Agreement |
| Simple, concise documentation of a loan |
Comprehensive, detailed documentation of a loan |
| Better for smaller loans with basic lending terms |
Better for larger loans with complex lending terms |
Often negotiable (i.e., can be transferred as long as it’s not prohibited)
|
Usually non-negotiable (i.e., cannot be transferred) |
Should I notarize my Promissory Note?
Although it's not required, notarizing a Promissory Note is an excellent way to lend credibility to your agreement. Notarization verifies the signatures and identities of the people involved in the Promissory Note.
You can also sign the Promissory Note in front of a witness. In this case, the witness must be a neutral party with no interest in the document.
In the event of a legal dispute, a notarized or witnessed Promissory Note can have significantly more credibility in a court of law.
