What is a 'Promissory Note' A promissory note is a financial instrument that contains a written promise by one party (the note's issuer or maker) to pay another party (the note's payee) a definite sum of money, either on demand or at a specified future date. A promissory note typically contains all the terms pertaining to the indebtedness, such as the principal amount, interest rate, maturity date, date and place of issuance, and issuer's signature.
Although financial institutions may issue them, promissory notes are debt instruments that allow companies and individuals to get financing from a source other than a bank. This source can be an individual or a company willing to carry the note (and provide the financing) under the agreed-upon terms. In effect, anyone becomes a lender when he issues a promissory note.
BREAKING DOWN 'Promissory Note'
The 1930 international convention that governs promissory notes and bills of exchange also stipulates that the term "promissory note" should be inserted in the body of the instrument and should contain an unconditional promise to pay.
In terms of their legal enforceability, promissory notes lie somewhere between the informality of an IOU and the rigidity of a loan contract. A promissory note includes a specific promise to pay, and the steps required to do so (like the repayment schedule), while an an IOU merely acknowledges that a debt exists, and the amount one party owes another. A loan contract, on the other hand, usually states the lender’s right to recourse – such as foreclosure – in the event of default by the borrower; such provisions are generally absent in a promissory note. While it might make note of the consequences of non-payment or untimely payments (such as late fees), it does not usually explain methods of recourse if the issuer does not pay on time.
Promissory notes that are unconditional and saleable become negotiable instruments that are extensively used in business transactions in numerous countries.
A promissory note is usually held by the party owed money. Once the debt has been fully discharged, it must be canceled by the payee and returned to the issuer.
History of Promissory Notes Promissory notes have had an interesting history. At times, they have circulated as a form of alternate currency, free of government control. In some places, the officially currency is in fact form of promissory note called a demand note (one with no stated maturity date or fixed term, allowing the lender to decide when to demand payment). In the United States, however, promissory notes are usually issued only to corporate clients sophisticated investors. Recently, however, promissory notes have also been also seeing increasing use when it comes to selling homes and securing mortgages.
Mortgages and Promissory Notes Homeowners usually think of their mortgage as an obligation to repay the money they borrowed to buy their residence. But actually, it's a promissory note they also sign, as part of the financing process, that represents that promise to pay back the loan, along with the repayment terms. The promissory note stipulates the size of the debt, its interest rate and late fees. In this case, the lender holds the promissory note until the mortgage loan is paid off. Unlike the deed of trust or mortgage itself, the promissory note is not entered into in county land records.
The promissory note can also be a way in which people who don't qualify for a mortgage can purchase a home. The mechanics of the deal, commonly called a take-back mortgage, are quite simple: The seller continues to hold the mortgage (taking it back) on the residence, and the buyer signs a promissory note saying that he or she will pay the price of the house plus an agreed-upon interest rate in regular installments. The payments from the promissory note often result in a positive monthly cash flow for the seller.
Section 4 of the Negotiable Instruments Act,1881 defines promissory note as an instrument in writing containing an unconditional undertaking, signed by the maker to pay a certain sum of money to or to the order of a certain person, or to the bearer of the instruments. The person who makes the promissory notes and promises to pay is called the maker. The person to whom the payment has to be made is called the payee.
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What is a 'Promissory Note'
A promissory note is a financial instrument that contains a written promise by one party (the note's issuer or maker) to pay another party (the note's payee) a definite sum of money, either on demand or at a specified future date. A promissory note typically contains all the terms pertaining to the indebtedness, such as the principal amount, interest rate, maturity date, date and place of issuance, and issuer's signature.
Although financial institutions may issue them, promissory notes are debt instruments that allow companies and individuals to get financing from a source other than a bank. This source can be an individual or a company willing to carry the note (and provide the financing) under the agreed-upon terms. In effect, anyone becomes a lender when he issues a promissory note.
BREAKING DOWN 'Promissory Note'
The 1930 international convention that governs promissory notes and bills of exchange also stipulates that the term "promissory note" should be inserted in the body of the instrument and should contain an unconditional promise to pay.
In terms of their legal enforceability, promissory notes lie somewhere between the informality of an IOU and the rigidity of a loan contract. A promissory note includes a specific promise to pay, and the steps required to do so (like the repayment schedule), while an an IOU merely acknowledges that a debt exists, and the amount one party owes another. A loan contract, on the other hand, usually states the lender’s right to recourse – such as foreclosure – in the event of default by the borrower; such provisions are generally absent in a promissory note. While it might make note of the consequences of non-payment or untimely payments (such as late fees), it does not usually explain methods of recourse if the issuer does not pay on time.
Promissory notes that are unconditional and saleable become negotiable instruments that are extensively used in business transactions in numerous countries.
A promissory note is usually held by the party owed money. Once the debt has been fully discharged, it must be canceled by the payee and returned to the issuer.
History of Promissory Notes
Promissory notes have had an interesting history. At times, they have circulated as a form of alternate currency, free of government control. In some places, the officially currency is in fact form of promissory note called a demand note (one with no stated maturity date or fixed term, allowing the lender to decide when to demand payment). In the United States, however, promissory notes are usually issued only to corporate clients sophisticated investors. Recently, however, promissory notes have also been also seeing increasing use when it comes to selling homes and securing mortgages.
Mortgages and Promissory Notes
Homeowners usually think of their mortgage as an obligation to repay the money they borrowed to buy their residence. But actually, it's a promissory note they also sign, as part of the financing process, that represents that promise to pay back the loan, along with the repayment terms. The promissory note stipulates the size of the debt, its interest rate and late fees. In this case, the lender holds the promissory note until the mortgage loan is paid off. Unlike the deed of trust or mortgage itself, the promissory note is not entered into in county land records.
The promissory note can also be a way in which people who don't qualify for a mortgage can purchase a home. The mechanics of the deal, commonly called a take-back mortgage, are quite simple: The seller continues to hold the mortgage (taking it back) on the residence, and the buyer signs a promissory note saying that he or she will pay the price of the house plus an agreed-upon interest rate in regular installments. The payments from the promissory note often result in a positive monthly cash flow for the seller.
Section 4 of the Negotiable Instruments Act,1881 defines promissory note as an instrument in writing containing an unconditional undertaking, signed by the maker to pay a certain sum of money to or to the order of a certain person, or to the bearer of the instruments.
The person who makes the promissory notes and promises to pay is called the maker. The person to whom the payment has to be made is called the payee.
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