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Promissory Note

What is a promissory note?

A promissory note is a financial, legal instrument involving three parties in a lending transaction: the maker, the lender, and the borrower. Promissory Note includes the loan terms, such as the amount, the interest rate, the due date, and the identities of the parties. The lender’s commitment is to provide money to the borrower as agreed upon. The maker can also be the lender in some cases.

Banks and other financial institutions can use promissory notes to lend money to people or businesses. Still, they can be used by anyone who wants to be a lender. For instance, If an individual lends money to another person (he could be a friend or family), he can write a promissory note to make the loan official and enforceable. A promissory note can be either secured or unsecured. The borrower pledges some property as collateral for the loan in secure promissory notes; later, the lender can take the property if the borrower fails to pay on maturity. No collateral is involved in an unsecured promissory note, and the lender has to rely on other methods to collect the debt if the borrower defaults.

What does a promissory note contain?

A promissory note should contain every detail related to the loan. These details could include the Name of the lender, borrower, repayment terms, and more:

  • Name of the borrower and lender

  • Address of the borrower and the lender

  • Interest rate and the type of interest

  • Amount of Loan

  • Repayment terms

  • The interest rate on the overdue amount

  • Prepayment process

  • Maturity date