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A promissory note, sometimes referred to as a note payable, is a
legal instrument ''Legal instrument'' is a legal Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environ ...
(more particularly, a financing instrument and a
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
instrument), in which one party (the ''maker'' or ''issuer'') promises in writing to pay a determinate sum of
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a ...

money
to the other (the ''payee''), either at a fixed or determinable future time or on demand of the payee, under specific terms.


Overview

The terms of a note usually include the
principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academic officer of a university A university ( la, universitas, 'a whole') is an educational institution, institution of higher ...
amount, the
interest rate An interest rate is the amount of interest In and , interest is payment from a or deposit-taking financial institution to a or depositor of an amount above repayment of the (that is, the amount borrowed), at a particular rate. It is disti ...
if any, the parties, the date, the terms of repayment (which could include interest) and the
maturity date Maturity or immaturity may refer to: * Adulthood Biologically, an adult is an organism In biology, an organism (from Ancient Greek, Greek: ὀργανισμός, ''organismos'') is any individual contiguous system that embodies the L ...
. Sometimes, provisions are included concerning the payee's rights in the event of a
default Default may refer to: Law * Default (law) In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and infl ...
, which may include
foreclosure Foreclosure is a legal process in which a lender A creditor or lender is a party 300px, '' Hip, Hip, Hurrah!'' (1888) by Peder Severin Krøyer, a painting portraying an artists' party in 19th century Denmark A party is a gathering of ...
of the maker's assets. In foreclosures and contract breaches, promissory notes under CPLR 5001 allow creditors to recover prejudgement interest from the date interest is due until liability is established. For loans between individuals, writing and signing a promissory note are often instrumental for tax and record keeping. A promissory note alone is typically unsecured.


Terminology

The term note payable is commonly used in
accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
(as distinguished from
accounts payable Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a company's balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, ...
) or commonly as just a "note", it is internationally defined by the ''Convention providing a uniform law for bills of exchange and promissory notes'', but regional variations exist. A
banknote A banknote (often known as a bill (in the US and Canada), paper money, or simply a note) is a type of negotiable promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a ...
is frequently referred to as a promissory note, as it is made by a bank and payable to bearer on demand.
Mortgage note In the United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states ...
s are another prominent example. If the promissory note is unconditional and readily saleable, it is called a
negotiable instrument A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a ...
.Whaley DJ. (2012)
Mortgage Foreclosures, Promissory Notes, and the Uniform Commercial Code
''Western State University Law Review''
LexisNexis entry
/ref> Demand promissory notes are notes that do not carry a specific maturity date, but are due on demand of the lender. Usually the lender will only give the borrower a few days' notice before the payment is due. Promissory notes may be used in combination with security agreements. For example, a promissory note may be used in combination with a
mortgage A mortgage loan or simply mortgage () is a loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a ...
, in which case it is called a
mortgage note In the United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states ...
.


Loan contracts

In common speech, other terms, such as "
loan In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avai ...
", "
loan agreement A loan agreement is a contract A contract is a legally binding document between at least two parties that defines and governs the rights and duties of the parties to an agreement. A contract is legally enforceable because it meets the requirem ...
", and "loan contract" may be used interchangeably with "promissory note". The term "loan contract" is often used to describe a contract that is lengthy and detailed. A promissory note is very similar to a loan. Each is a legally binding contract to unconditionally repay a specified amount within a defined time frame. However, a promissory note is generally less detailed and less rigid than a loan contract. For one thing, loan agreements often require repayment in installments, while promissory notes typically do not. Furthermore, a loan agreement usually includes the terms for recourse in the case of default, such as establishing the right to foreclose, while a promissory note does not.


Difference from IOU

Promissory notes differ from
IOU An IOU (abbreviated An abbreviation (from Latin ''brevis'', meaning ''short'') is a shortened form of a word or phrase, by any method. It may consist of a group of letters, or words taken from the full version of the word or phrase; for exa ...
s in that they contain a specific promise to pay along with the steps and timeline for repayment as well as consequences if repayment fails. IOUs only acknowledge that a debt exists.


Negotiability

Negotiable instrument A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a ...
s are unconditional and impose few to no duties on the issuer or payee other than payment. In the United States, whether a promissory note is a negotiable instrument can have significant legal impacts, as only negotiable instruments are subject to Article 3 of the Uniform Commercial Code and the application of the
holder in due course In commercial law, a holder in due course is someone who accepts a negotiable instrument in a value-for-value exchange without reason to doubt its legitimacy. A holder in due course acquires the right to make a claim for the instrument's value aga ...
rule. The negotiability of
mortgage note In the United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states ...
s has been debated, particularly due to the obligations and "baggage" associated with mortgages; however, in mortgages notes are often determined to be negotiable instruments. In the United States, the Non-Negotiable Long Form Promissory Note is not required.


Use as financial instruments

Promissory notes are a common financial instrument in many jurisdictions, employed principally for short time financing of companies. Often, the seller or provider of a service is not paid upfront by the buyer (usually, another company), but within a period of time, the length of which has been agreed upon by both the seller and the buyer. The reasons for this may vary; historically, many companies used to balance their books and execute payments and debts at the end of each week or tax month; any product bought before that time would be paid only then. Depending on the jurisdiction, this deferred payment period can be regulated by law; in countries like
France France (), officially the French Republic (french: link=no, République française), is a transcontinental country This is a list of countries located on more than one continent A continent is one of several large landmasses ...

France
,
Italy Italy ( it, Italia ), officially the Italian Republic ( it, Repubblica Italiana, links=no ), is a country consisting of a peninsula delimited by the Alps The Alps ; german: Alpen ; it, Alpi ; rm, Alps; sl, Alpe ) are the highest ...

Italy
or
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Spain
, it usually ranges between 30 and 90 days after the purchase. When a company engages in many of such transactions, for instance by having provided services to many customers all of whom then deferred their payment, it is possible that the company may be owed enough money that its own liquidity position (i.e., the amount of cash it holds) is hampered, and finds itself unable to honour their own debts, despite the fact that by the books, the company remains solvent. In those cases, the company has the option of asking the bank for a short-term loan, or using any other such short-term financial arrangements to avoid
insolvency In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to comp ...
. However, in jurisdictions where promissory notes are commonplace, the company (called the ''payee'' or ''lender'') can ask one of its debtors (called the ''maker'', ''borrower'' or ''payor'') to ''accept'' a promissory note, whereby the maker signs a legally binding agreement to honour the amount established in the promissory note (usually, part or all its debt) within the agreed period of time. The lender can then take the promissory note to a financial institution (usually a bank, albeit this could also be a private person, or another company), that will exchange the promissory note for cash; usually, the promissory note is cashed in for the amount established in the promissory note, less a small discount. Once the promissory note reaches its ''maturity date'', its current holder (the bank) can execute it over the emitter of the note (the debtor), who would have to pay the bank the amount ''promised'' in the note. If the maker fails to pay, however, the bank retains the right to go to the company that cashed the promissory note in, and demand payment. In the case of unsecured promissory notes, the lender accepts the promissory note based solely on the maker's ability to repay; if the maker fails to pay, the lender must honour the debt to the bank. In the case of a secured promissory note, the lender accepts the promissory note based on the maker's ability to repay, but the note is secured by a thing of value; if the maker fails to pay and the bank reclaims payment, the lender has the right to execute the security.


Use as private money

Thus, promissory notes can work as a form of private money. In the past, particularly during the 19th century, their widespread and unregulated use was a source of great risk for banks and private financiers, who would often face the insolvency of both debtors, or simply be scammed by both.


History

stipulated repayment of a
loan In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avai ...
by a
debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that ...
to a
creditor A creditor or lender is a party 300px, '' Hip, Hip, Hurrah!'' (1888) by Peder Severin Krøyer, a painting portraying an artists' party in 19th century Denmark A party is a gathering of people who have been invited by a host A host is ...

creditor
on a Repayment plan, schedule with a
maturity date Maturity or immaturity may refer to: * Adulthood Biologically, an adult is an organism In biology, an organism (from Ancient Greek, Greek: ὀργανισμός, ''organismos'') is any individual contiguous system that embodies the L ...
specified in Contract, written contractual terms. Law 122 stipulated that a Deposit account, depositor of gold, silver, or other Personal property, chattel/movable property for Safe, safekeeping must present all articles and a signed contract of bailment to a notary before depositing the articles with a Banker (ancient)#Mesopotamia, banker, and Law 123 stipulated that a banker was discharged of any Liability (accounting), liability from a contract of bailment if the notary denied the existence of the contract. Law 124 stipulated that a depositor with a Banknote, notarized contract of bailment was entitled to Redemption value, redeem the entire value of their deposit, and Law 125 stipulated that a banker was Legal liability, liable for replacement of deposits Theft, stolen while in their Possession (law), possession. 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 a durable lightweight substance 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. According to tradition, in 1325 a promissory note was signed in Milan. However, according to a travelogue of a visit to Prague in 960 by Ibrahim ibn Yaqub, small pieces of cloth were used as a means of trade, with these cloths having a set exchange rate versus silver. Around 1150 the History of the Knights Templar#Bankers, Knights Templar issued promissory notes to pilgrims, pilgrims deposited their 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 in an amount of treasure of equal value. Around 1348 in Görlitz, Gorlitz, Germany, the Jewish creditor Adasse (townswoman), 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. The same happens for the ones issued in Valencia in 1371 by Bernat de Codinachs for Manuel d'Entença, a merchant from Huesca (then part of the Crown of Aragon), amounting a total of 100 florins. In all these cases, the promissory notes were used as a rudimentary system of paper money, for the amounts issued could not be easily transported in metal coins between the cities involved. Strozzi family, Ginaldo Giovanni Battista Strozzi issued an early form of promissory note in Medina del Campo (
Spain , image_flag = Bandera de España.svg , image_coat = Escudo de España (mazonado).svg , national_motto = , national_anthem = , image_map = , map_caption = , image_map2 ...

Spain
), against the city of Besançon in 1553. However, there exists notice of promissory notes being in used in Mediterranean commerce well before that date. In 2005, the Korean Ministry of Justice and a consortium of financial institutions announced the service of an electronic promissory note (eNote) service, after years of development, allowing entities to make promissory notes (notes payable) in business transactions digitally instead of on paper, for the first time in the world. In the United States, eNotes were made possible as a result of the Electronic Signatures in Global and National Commerce Act in 2000 and the Uniform Electronic Transactions Act (UETA). An eNote must meet all the requirements to be a written promissory note.


International law

In 1930, under the League of Nations, a ''Convention providing a uniform law for bills of exchange and promissory notes'' was drafted and ratified by eighteen nations. Article 75 of the treaty stated that a promissory note shall contain: * the term "''promissory note''" inserted in the body of the instrument and expressed in the language employed in drawing up the instrument * an unconditional promise to pay a determinate sum of money; * a statement of the time of payment; * a statement of the place where payment is to be made; * the name of the person to whom or to whose order payment is to be made; * a statement of the date and of the place where the promissory note is issued; * the signature of the person who issues the instrument (maker).


Worldwide


England and Wales


United States

In the United States, a promissory note that meets certain conditions is a
negotiable instrument A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a ...
regulated by article 3 of the Uniform Commercial Code. Negotiable promissory notes called
mortgage note In the United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states ...
s are used extensively in combination with Mortgage law, mortgages in the financing of real estate transactions. One prominent example is the Fannie Mae model standard form contract Multistate Fixed-Rate Note 3200, which is publicly available. Promissory notes, or commercial papers, are also issued to provide capital to businesses. However, Promissory Notes act as a source of Finance to the company's creditors. The various State law enactments of the Uniform Commercial Code define what is and what is not a promissory note, in section 3-104(d): Thus, a writing containing such a disclaimer removes such a writing from the definition of ''negotiable instrument'', instead simply memorializing a contract.


See also

*Bond (finance) *Credit card *Government bond *Letter of credit *Notes receivable *Student loan *Warrant of payment, Warrant (of Payment)


References

{{DEFAULTSORT:Promissory Note Legal documents Negotiable instrument law Securities (finance) Interest-bearing instruments de:Schuldscheindarlehen fr:Billet à ordre