Promissory note
A written promise to pay a specified sum to a payee.
A promissory note, also called a note payable, is a written promise from one party (the maker or issuer) to pay a specific sum of money to another party (the payee), according to any terms laid out in the document. Historically used as a form of private money, promissory notes are common financial tools in many places, often serving as commercial paper for short-term company financing.
The note’s terms usually include the principal amount, any interest rate, the names of the parties, the date, repayment details (which may involve interest), and the maturity date. Some notes also include provisions about the payee’s rights if the maker defaults, such as foreclosing on the maker’s assets. In cases of foreclosure or contract breach, creditors can recover prejudgment interest from the date interest was due until liability is established, under CPLR 5001. For personal loans, writing and signing a promissory note helps with taxes and record keeping. A promissory note by itself is typically unsecured.
In accounting, the term "note payable" is common, distinct from "accounts payable." Internationally, the Convention providing a uniform law for bills of exchange and promissory notes defines it, though regional variations exist. A banknote is often considered a promissory note, since a bank issues it and pays it to the bearer on demand. Mortgage notes and real estate notes are other types. A promissory note is a negotiable instrument if it contains an unconditional promise. Demand promissory notes have no set maturity date and are due when the lender asks, usually with only a few days’ notice. Promissory notes can also be paired with security agreements, like a mortgage, creating a mortgage note.
In everyday speech, terms like "loan," "loan agreement," and "loan contract" are often used interchangeably with "promissory note." However, a "loan contract" usually refers to a longer, more detailed document. A promissory note is similar to a loan—both are legally binding promises to repay a set amount within a defined time—but a promissory note is generally less detailed and less rigid. Loan agreements often require installment payments, while promissory notes typically do not. Loan agreements also usually include recourse terms for default, like the right to foreclose, which a promissory note lacks.
Promissory notes differ from IOUs because they include a specific pro
- field
- Finance and Law
- known_for
- Written promise to pay a determinate sum of money
- type
- Financial instrument
- related_terms
- Note payable, mortgage note, banknote
- legal_framework
- Convention providing a uniform law for bills of exchange and promissory notes; UCC Article 3 (US)
Lore & Background
Promissory notes have ancient origins. The Code of Hammurabi stipulated repayment of a loan by a debtor to a creditor on a schedule with a maturity date specified in written contractual terms. Carthage was purported to have issued lightweight promissory notes on parchment or leather before 146 BC. In China during the Han dynasty promissory notes appeared in 118 BC and were made of leather. The Romans may have used promissory notes in 57 AD as evidence of a promise in that time has been found in London among the Bloomberg tablets.
Historically, promissory notes have acted as a form of privately issued currency. Flying cash or feiqian was a promissory note used during the Tang dynasty (618 – 907). Flying cash was regularly used by Chinese tea merchants, and could be exchanged for hard currency at provincial capitals. The Chinese concept of promissory notes was introduced by Marco Polo to Europe. Around 1150 the Knights Templar issued promissory notes to pilgrims, who deposited valuables with a local Templar preceptory before embarking, received a document indicating the value of their deposit, then used that document upon arrival in the Holy Land to retrieve their funds.
According to tradition, in 1325 a promissory note was signed in Milan. Around 1348 in Görlitz, Germany, the Jewish creditor Adasse owned a promissory note for 71 marks. There is also evidence of promissory notes being issued in 1384 between Genoa and Barcelona, although the letters themselves are lost.
Reader's Guide
Promissory notes are significant as a foundational financial instrument that enables deferred payment and short-term financing. They differ from IOUs by containing a specific promise to pay along with steps, timeline, and consequences for non-payment. In modern commerce, promissory notes are used as commercial paper for short-term company financing, allowing sellers to receive payment after an agreed period. When a company holds many such deferred payments, it can take a promissory note from a debtor to a bank, which exchanges it for cash (less a discount). At maturity, the bank collects from the maker; if the maker fails to pay, the bank may demand payment from the company that cashed the note. Unsecured notes rely solely on the maker's ability to repay, while secured notes are backed by a thing of value. Promissory notes can be negotiable instruments if they contain an unconditional promise, subjecting them to Article 3 of the Uniform Commercial Code in the United States and the holder in due course rule. Their legacy includes use as private money, which in the 19th century posed risks of insolvency and fraud for banks and financiers.
Did You Know?
- A promissory note is said to be a negotiable instrument when it contains an unconditional promise.
- Demand promissory notes do not carry a specific maturity date but are due on demand of the lender.
- In the United States, the Non-Negotiable Long Form Promissory Note is not required.
- The Chinese concept of promissory notes was introduced by Marco Polo to Europe.
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