Is a Promissory Note Legally Binding?

Promissory Notes Are Legal Contracts

A promissory note or promissory letter is a legal instrument similar in nature to any common law contract. In order for a contract to be enforceable, it must contain certain legal conditions such as an offer and an acceptance of that offer. 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, the promissory note will contain all the terms and conditions associated with the agreement that have been established between the two parties. It will detail the total amount of money or capital loaned, the interest rate that is charged, and the timeline for repayment. When all of these conditions are addressed in the promissory note details and it is signed by both parties, the promissory note meets all the elements of a legally binding contract.

Crafting a Promissory Note

Mortgages as Promissory Notes

Promissory notes can also be used for lending purposes that are more complex and involve larger amounts of property or money. Home mortgages are a form of promissory note and they are very similarly crafted and worded to a standardized simple promissory note.

The main difference is that mortgage notes are written for large amounts of money and are secured by the property that is purchased with that money. The details of the mortgage note are generally more complex due to the involvement of lending institutions as well as government regulations that oversee real estate lending practices. As long as all the necessary elements exist in the mortgage promissory note to mirror common law contract requirements, the note fulfills all the obligations under the law to be legally binding.

When a Borrower Defaults

Whether or not a promissory note is secured with collateral or is unsecured and based solely on the promise to repay, the same principles of legality apply. If the borrower should default on the note and not be able to repay, the lender of a secured note can find relief by legally repossessing the property that was promised as collateral on the note.

If the note is for a monetary loan and is not secured, the lender has the legal authority to seek restitution through the court system and secure a judgment against the borrower. While this does not absolutely guarantee repayment of the promissory note, it does create a legal judgment against the borrower which can then be pursued through collection activity.

The other disadvantage to an unsecured promissory note or promissory letter is that if the borrower should file bankruptcy, creditors with secured interests will be repaid before any creditor with unsecured interests. This creates a possibility where the unsecured lender might not receive any repayment for the breach of agreement.

Promissory Notes Are Useful Legal Tools

Promissory notes are a valuable legal tool that any individual can use to legally bind another individual to an agreement for purchasing goods or borrowing money. A well-executed promissory note has the full effect of law behind it and is legally binding on both parties.

When it comes to uncomplicated and routine agreements between two parties that do not require expert legal guidance from a licensed attorney, the simple promissory note can be drafted in many different ways to easily create a binding legal agreement. It is a quick and inexpensive method that any individual can use to protect their interests, and it is easier to enforce than a simple handshake.

How to Create a Promissory Note

Use our customizable promissory note template to quickly and easily create, download, and print your custom promissory note right now.