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The Value of a Promissory Note

What Is a Promissory Note?

A promissory note or promissory letter is a written and signed agreement between two parties to repay a definite sum of money by a specific time. The terms of a legal promissory note include the amount to be borrowed, any interest to be charged, and the specific terms of repayment. The note must also contain proper identification of the parties and any default provisions should the borrower fail to repay the debt.

Promissory note forms are used all the time by financial institutions when they loan money to individuals and businesses, but it is just as important for individuals to establish a proper promissory note when they loan money to family members or other individuals in order to protect their assets.

Secured and Unsecured Promissory Notes

Promissory notes can be unsecured or secured by collateral, which is normally the asset that is purchased using the loaned money. Banks and other financial institutions will require property to be used as collateral to secure the note whereas an individual loaning money to a family member may choose to forego the use of collateral. The same can be said for interest to be charged on the debt.

Interest and Family and Friends Loans

A financial institution usually charges interest when loaning money but an individual is at liberty to collect interest or not depending on who they are lending to. Usually, when lending to family members or close friends, it is advisable to charge little to no interest to avoid any bad feelings. However, an individual is well within their rights to charge reasonable interest if they are inclined to do so.

How a Promissory Note Differs from an IOU

A promissory note or promissory letter differs from an IOU in that it contains a specific, unconditional promise to pay where an IOU is a simple acknowledgement of the debt without any terms for repayment.

Either party can form the promissory note, but it is advisable for the lender to create the note in order to protect their assets by putting provisions in for default.

The note should not include any provisions that could otherwise be invalidated such as very high interest rates, uncommon penalties for default, or payments that are late.

A Promissory Note Is a Valuable Tool

A promissory note form is an instrument that provides the security needed for an individual or financial institute to feel comfortable enough to loan money to another individual or business. It provides a clear structure for repayment of the debt and it protects the lender from default and the borrower from unscrupulous lending practices. It is a valuable tool that can be used by the largest lender or a single individual to protect themselves when loaning another person money.

How to Create a Promissory Note

Use our promissory note template to create, download, and print your legal document today.