A promissory note is basically a written promise by an individual to pay a definite sum of money to the bearer. There are many different types of promissory notes.
Common situations in which they are used are for student loans, business loans, car loans and for informal loans between family and friends. In some cases, such as an informal loan between friends, a promissory note is very simple. In other cases, such as a business loan, it is likely to be more complex.
When not to use a promissory note
If a loan is for a substantial amount and you’re loaning to or from an unknown party, using a loan agreement is preferable to using a promissory note. It has stricter guidelines and some form of security for the loan is usually required. Only a borrower has to sign a promissory note while a loan agreement must be signed by both parties.
What details should appear in promissory notes
As promissory notes are agreements between two parties, the terms and conditions can be set out in a discussion or in writing. Most promissory notes are written contracts but verbal agreements regarding terms and conditions are still seen as binding.
Some details appear in most promissory notes, such as:
- Name of the lender and borrower.
- The address of the borrower.
- The amount of money borrowed.
- The loan period length.
- The interest rates if interest is to be charged.
- Information about defaults and penalties.
- If there’s collateral involved, it identifies the collateral.
- Date and place where the note is issued.
- Signature of the borrower.
Legal advice is not necessary
Promissory notes are not complex legal documents full of legal jargon and as long as the terms and conditions are clearly defined and agreed upon by both the lender and borrower, there is no real need to seek legal expertise.
It is easy to use an online template to create a promissory note. Net Lawman has a large variety of templates available with guidelines on how to complete them. It is very convenient to create a personalised promissory note by editing a template, printing it out and signing it.
Generally speaking, no witness or notary public has to witness the signing of a promissory note. It can help to have a third party to witness the signing of the note in the event that repayment needs to be enforced. The borrower must sign but the lender can sign as well and even get the signatures notarised although this isn’t required.
What makes a promissory note invalid?
If a borrower does not sign the note, it is invalid. If any clauses are not clear or one party signed under any kind of duress, it may be difficult to enforce the document if a dispute goes to court.
Similarly, if the note is biased towards one person or any of the terms seem unfair, such as charging very high interest rates, this could make enforcing the promissory note difficult if a dispute goes to court.
The lender is required to keep the promissory note until the money has been repaid. There is always a danger that a borrower stops making payments.
If the loan is secured with collateral, the lender can use it to get the money back. If the loan is unsecured, the lender may battle to get back the money. If the lender can’t find the promissory note or even a copy of it, it will be even more difficult to prove that the borrower owes the money.