A
promissory note is a
negotiable instrumentA negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either...
, wherein one party (the
maker or
issuer) makes an unconditional promise in writing to pay a determinate sum of
moneyMoney is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
to the other (the
payee), either at a fixed or determinable future time or on demand of the payee, under specific terms.
Referred to as a
note payable in accounting, or commonly as just a "note", it is internationally regulated by the
Convention providing a uniform law for bills of exchange and promissory notes. Bank note is frequently referred to as a promissory note: a promissory note made by a bank and payable to bearer on demand.
Overview
The terms of a note usually include the principal amount, the
interest rateAn interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
if any, the parties, the date, the terms of repayment (which could include interest) and the maturity date. Sometimes, provisions are included concerning the payee's rights in the event of a
defaultIn finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
, which may include foreclosure of the maker's assets.
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.
For loans between individuals, writing and signing a promissory note are often instrumental for tax and record keeping.
International law
Definition and usage of promissory notes are internationally established by the
Convention providing a uniform law for bills of exchange and promissory notes, signed in Geneva in 1930. 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).
United States law
In the
United StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
, a promissory note that meets certain conditions is a
negotiable instrumentA negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either...
regulated by article 3 of the
Uniform Commercial CodeThe Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...
. Negotiable promissory notes are used extensively in combination with mortgages in the financing of
real estateIn general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
transactions. Promissory notes, or
commercial paperIn the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued by large banks and corporations to get money to meet short term debt obligations , and is only backed by an issuing bank or...
s, 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
contractA contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
.
British law
History
Common prototypes of bills of exchanges and promissory notes originated in China. Here, in the 8th century during the reign of the dynasty Tang used special instruments – feitsyan for the safe transfer of money over long distances. Later such document for money transfer used by Arab merchants, who had used the prototypes of bills of exchange – suftadja and hawala in 10–13th centuries, then such prototypes had used by Italian merchants in the 12th century. In Italy in 13–15th centuries bill of exchange and promissory note obtain their main features and further phases of its development have been associated with France (16–18th centuries, where the endorsement had appeared) and Germany (19th century, formalization of Exchange Law). In England (and later in the U.S.) Exchange Law was different from continental Europe because of different legal systems.
Historically, promissory notes have acted as a form of privately issued
currencyIn economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
. The first evidence of a promissory note being issued is that which Ginaldo Giovanni Battista Stroxxi issued in
Medina del CampoMedina del Campo is a town located in the middle of the Spanish Meseta Central, in the province of Valladolid, Castile-Leon autonomous region, 45 km from Valladolid. It is the capital of a farming area, far away from the great economic centres.-History:...
(
SpainSpain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
), against the city of
BesançonBesançon , is the capital and principal city of the Franche-Comté region in eastern France. It had a population of about 237,000 inhabitants in the metropolitan area in 2008...
in 1553. However, there exists notice of promissory notes being in used in the Mediterranean commerce well before that date. Tradition has it that the first one ever was signed in
MilanMilan is the second-largest city in Italy and the capital city of the region of Lombardy and of the province of Milan. The city proper has a population of about 1.3 million, while its urban area, roughly coinciding with its administrative province and the bordering Province of Monza and Brianza ,...
in 1325. There's constance of promissory notes being issued in 1384 between
GenovaGénova may refer to:* Spanish spelling of the city of Genoa, Italy* Génova, Quindío, a municipality in the department of Quindío, Colombia* Génova, Quetzaltenango, a municipality in the department of Quetzaltenango, Guatemala...
and
BarcelonaBarcelona is the second largest city in Spain after Madrid, and the capital of Catalonia, with a population of 1,621,537 within its administrative limits on a land area of...
, 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
HuescaHuesca is a city in north-eastern Spain, within the autonomous community of Aragon. It is also the capital of the Spanish province of the same name and the comarca of Hoya de Huesca....
(then part of the
Crown of AragonThe Crown of Aragon Corona d'Aragón Corona d'Aragó Corona Aragonum controlling a large portion of the present-day eastern Spain and southeastern France, as well as some of the major islands and mainland possessions stretching across the Mediterranean as far as Greece...
), 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.
Difference from IOU
Promissory notes differ from
IOUAn IOU is usually an informal document acknowledging debt. An IOU differs from a promissory note in that an IOU is not a negotiable instrument and does not specify repayment terms such as the time of repayment. IOUs usually specify the debtor, the amount owed, and sometimes the creditor...
s in that they contain a specific promise to pay, rather than simply acknowledging that a debt exists. In common speech, other terms, such as "
loanA loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
," "
loan agreementA loan agreement is a contract entered into between which regulates the terms of a loan. Loan agreements usually relate to loans of cash, but market specific contracts are also used to regulate securities lending....
," and "loan contract" may be used interchangeably with "promissory note" but these terms do not have the same legal meaning.
Difference from loan contract
Whereas promissory notes are evidence of a loan, they are not loan contract. In fact the loan contract is legally distinct from promissory notes, and contains all the terms and conditions of the loan agreement.
See also
- Bank note
- Treasury note
- Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
- Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
- Letter of credit
A standard, commercial letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking....
- Student loan
A student loan is designed to help students pay for university tuition, books, and living expenses. It may differ from other types of loans in that the interest rate may be substantially lower and the repayment schedule may be deferred while the student is still in education...
- Warrant (of Payment)