When is a promissory note used?

A promissory note is used to keep a record of the transaction when money is loaned from one party to another party.  It is a written promise by a borrower to pay a specific amount of money to a lender.  It is a legal "IOU."  Often an interest rate will be set on the unpaid amount of the loan.


What is the difference between a promissory note on installment and a promissory note on demand?

An installment promissory note is used when the repayment of the loan is made on a periodic (usually monthly) basis, while a demand promissory note is used when the loan should be repaid in full upon the lender's demand. With an installment promissory note, the borrower will be able to spread the payments over a period of time.


What information should a promissory note contain?

• Repayment type.  Examples are:
  • Monthly payments (equal amount)
  • Interest-only payments on a monthly basis with a final balloon payment
  • Monthly payments (equal amount) with a final balloon payment
  • Payment on demand
• Interest Rate - floating rate, adjustable rate or fixed rate
• Expected payment date
• Expected payment method
• The lender's right to demand full payment of the loan if any partial payments are past due
• Attorney's fees clause
• Printed name and signature of borrower

• Penalties and surcharges for late payment
• The lender's right to order payment to be made to a third party

[Back to FAQ list]   [Jump to this category page]