Debt Dictionary

Promissory Note

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A legal document that records comprehensive details about loan transaction between individuals or parties, Promissory Notes are extremely useful for a gamut of real estate and financial transactions, business deals and personal loans. The terms and conditions of a legal contract are agreed upon and signed by both parties on a promissory note which is legally binding. The note normally carries the legal terms, repayment schedule, interest rates and consequences when a party fails to uphold the obligations. The promissory note becomes a future reference in the event of any legal hassles between the parties.


Though many people hesitate from using a legal contract while lending or borrowing from near and dear, the personal promissory notes are imperative for any kind of financial transactions. A personal promissory note helps the lenders and borrowers to avoid misunderstandings. Amount to be repaid, terms of repayments, interest rates and risks entailing default should be delineated in the personal promissory notes.

While dealing with a commercial lender, a commercial promissory note becomes a prerequisite. The terms, interest rates, principal amount and legal terms are included in the promissory note. When the borrower defaults, the lender can demand complete repayment using the commercial promissory note. The lender also has the right to sue the borrower when he defaults.

Investment promissory notes are used to get extra credits for uplifting the business. The borrower issues investment promissory note to the investors for obtaining a loan. The promissory note guarantees repayment within a stipulated period of time.

For real estate transactions, negotiable promissory notes are compulsory. The real estate promissory note must fulfill a few conditions set by National Conference of Commissioners on Uniform State Laws, according to Article 3 of Uniform Commerical Code before it is legally relevant.


Convertible promissory notes are documents or contract that can be exchanged for cash or assets. This kind of promissory notes can be exchanged for cash or share. You can also exchange them for assets of equal value like bonds instead of gold or currency.


When the borrowers fail to repay the principal amount or interest within the time specified in the contract or promissory note, the lenders can legally file a law suit against the borrowers and slam penalties and legal action against the defaulters. Lenders can insist on repayment of the balance amount immediately, if they have a promissory note as an evidence of the deal.

Companies provide promissory notes in exchange of corporate credit from the lenders. The lenders can sell these notes to other buyers. The investors can seek the help of the Securities and Exchange Commission for ensuring that companies will pay the debt immediately, before lending loans.

Self- employed people can get necessary loans for their homes by using promissory notes. Self- employed individuals do not have a regular and fixed income. Creditors scrutinize such borrowers and insist on a promissory note for security.

Get the promissory note notarized, when you decide to use it so that it is legally binding and recorded publicly.

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