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.