What is the difference between a loan and a promissory note?

Both promissory notes and loan agreements fulfill the same purpose; they both evidence a debt owed between a borrower and a lender. However, in practice, a promissory note is generally not as detailed as a loan agreement. A loan agreement includes additional details regarding the promises and obligations of the parties as well as the ability to include a guarantor as co-signer. Both agreements allow you to specify property as collateral for the loan.

Is a promissory note legally enforceable?

A promissory note is a legal instrument similar in nature to any contract. To make a contract enforceable, it must contain certain legal conditions which are an offer, an acceptance of that offer, and consideration, also known as value. Contracts indicate the type and amount of payment for services or goods rendered. In the case of a legal promissory note, the contract will be shaped around the amount of money or capital loaned and the terms of repayment of the promissory note. As with any contract, a promissory note contains terms and conditions associated with an agreement that has been established between two parties. It details the total amount of money or capital loaned, the interest rate charged, and the timeline for repayment. When all of these conditions are addressed in the details of the promissory note and it is executed correctly, the promissory note meets all the elements of a legally binding contract.

What does "due on demand" mean?

An "on demand" loan means that repayment is not set to a fixed schedule of payments. Repayment will be due when the lender gives the borrower notice that the loan needs to be paid back. In most cases, a promissory note will stipulate a mandatory notice period that the lender must give to the borrower before the loan is repayable. For example, if a promissory note stipulates a 90-day notice period, then when the lender gives notice to the borrower, the borrower will have 90 days to gather and deliver the funds.

What is the difference between compound and simple interest?

Simple interest is interest that is only calculated on the unpaid principal amount of the loan. Compound interest is interest that is calculated both on the unpaid principal amount and the unpaid interest.

What other documents might I need?

You can often benefit from additional legal protections by completing documents such as a loan agreement and sales contract. For instance, a loan agreement offers the parties additional options for repayment and securing the transaction. Also, a sales contract may apply to your situation when goods or services are being exchanged and allows the parties to agree on details concerning shipment, delivery, warranties, and other important terms.

Promissory Note

In a promissory note, a borrower promises to repay the other party in return for receiving money, goods, or services.

Use our template to clearly set forth all the important terms, including the loan amount, interest rate, due date, payment structure and more.

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Promissory Note

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When to use a promissory note

Loan some money to a friend or family member
Set important loan details in writing
Get financing for a business project
Take out a small personal loan

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Want additional legal protections?

Avoid any possible misunderstandings by accompanying your loan agreement with these related documents

Loan Agreement

A loan agreement offers the parties additional options for repayment and securing the transaction.

Create Document

Sales Contract

If goods or services are being exchanged, a sales contract allows the parties to agree on all details.

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How to create a promissory note in 3 steps

Gather Information

Begin by adding the relevant information for each party, such as name, address, and contact information. Note that the borrower is the party receiving the loan from the lender and making the promise to repay on the promissory note.

Answer Key Questions

Next, you will fill out the details of the transaction. It is important to be as specific as possible in identifying what exactly the borrower is receiving from the lender, such as money, goods, or services. Then provide the details of repayment, including how long the borrower has to repay and the payment frequency.

Review

After completing your promissory note, be sure to review it thoroughly to ensure that it meets your needs. You may make textual edits if you wish. Though not required in many states, we recommend using a notary to witness the signing of the document as well as include a regular witness. After it is signed, distribute copies to each party for safekeeping.

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