What is a promissory note and how does it work?

You want to get a personal loan, but you have to sign a promissory note. But what is a promissory note, and how does it work?

A promissory note is one of the guarantees a lender uses to make sure you repay the money you borrow. But there’s more to it than that.

Read through this guide to learn about how promissory notes work and the different types of promissory notes you might encounter.

After you’re finished learning how promissory notes work, enter your ZIP code in the free online quote tool above and compare multiple lenders in your area.

What is a promissory note and how does it work?

A promissory note is defined as a legal agreement between a borrower and lender where the borrower agrees to repay a loan.

The lender usually includes the promissory note as legal insurance that the borrower agrees with the terms of the loan, with or without interest.

What is a promissory note? With the examples that follow, we’ll cover the major types of promissory notes and what they mean.

Types of Promissory Notes

What are some examples of promissory notes? Check out this list of promissory notes to see some examples.

• Simple (informal) promissory note – Common promissory note when you loan money to family and friends
• Car promissory note – An agreement with the lender to pay back auto loans
• Demand promissory note – A promissory note where the borrower agrees to repay a lump sum payment immediately or on a particular date
• Secured promissory note – The borrower agrees to put up collateral to receive a personal loan
• Unsecured promissory note – A lender can give a personal loan to the borrower without attaching collateral to the loan agreement
• Commercial promissory note – A promissory note that’s attached to  business loans from the bank, credit union, or finance company, which usually come with interest
• Real estate promissory note – This promissory note is attached to mortgage loans
• Corporate credit promissory note – A promissory note that’s connected to a short-term loan until a borrower (usually a company) recovers money from selling products and services
• Investment promissory note – These promissory notes are from investors who finance borrowers with a much higher sum of money
• Student promissory note – The promissory note attached to student loans

When you pursue a loan, you’ll notice the promissory note attached to the terms and conditions. Informal promissory notes are necessary, regardless of the relationship between friends and family.

Read on to learn more about what’s included in promissory notes, along with some frequently asked questions.

What’s included in a promissory note?

Promissory notes have to be fair. Promissory note requirements include the signatures of the borrower and the lender.

But what about other elements of the promissory note? Here are the components that make up the promissory note:

• Borrower (payer)
• Lender (payee)
• Date the loan was initiated
• Date the first payment is due
• Total amount due (principal)
• Payment details
• Signatures from borrower and lender
• End date of promissory note
• Interest rates (if any)

Informal promissory notes may not have as many details. For example, many personal loans from family or friends won’t have interest rates or end dates.

We recommended getting a loan from a bank, credit union, or loan agency to avoid personal conflicts with family and friends.

When should you use a promissory note?

If you’re in a position to loan a friend or family member money, you should draw up a promissory note before you give them the loan. This holds the borrower legally accountable for the money they borrow.

What makes a promissory note invalid?

Never ask anyone to sign a promissory note if they’re under emotional or mental stress. Doing so would void the promissory note.

Promissory notes are legal agreements. However, if the conditions of a promissory note are illegal, the law won’t acknowledge the loan.

According to the Frankowski Firm, a promissory note fraud scheme is investment fraud, and the law will void a promissory note and the loan attached to it in this case.

Search your state statutes to see what you can include in a promissory note.

How many promissory note repayments options are there?

There are many ways you can repay your loan. However, your loan repayment options vary for each company and person. Here is a list of options you may have.

• Pay a lump sum
• Due on demand (specific date)
• Pay installments
• With or without interest

The easiest option on the list is installments. With installments, you’re able to spread out your payments. However, you can get payments over with if you pay a lump sum.

Most banks, credit unions, and other finance companies will attach interest rates to your loan.

What happens when you don’t pay after signing a promissory note?

There are legal consequences for not paying your loan after signing a promissory note.

Lawsuits only occur if the borrower refuses to communicate and pay on the loan.

The lender can sue you for the loan balance, and the government can garnish your wages until the debt is paid off. This includes your tax returns.

Promissory Note: What’s the bottom line?

A promissory note is part of a contract that says that a borrower will repay the money they borrow from a lender. Most loan agencies, including banks and credit unions, have promissory notes attached to loans.

Now that you know more about promissory notes, use our free comparison tool below to compare multiple lenders near you.