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A promissory note, also referred to as a note payable in accounting, is a contract
Contract

A contract is an exchange of promises between two or more parties to do, or refrain from doing, an act which is enforceable in a court of law. It is a binding legal agreement....
 where one party (the maker or issuer) makes an unconditional promise in writing to pay a sum of money
Money

Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are as a medium of exchange, a unit of account, and a store of value....
 to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. They differ from IOU
IOU (debt)

An IOU is a document acknowledging debt. The term is derived from the opening phrase "I owe unto" and/or the pronunciation of "I owe you". An IOU differs from a promissory note in not specifying the time of repayment....
s in that they contain a specific promise to pay, rather than simply acknowledging that a debt exists.

The terms of a note typically include the principal amount, the interest rate
Interest rate

An interest rate is the price a borrower pays for the use of money they do not own, for instance a small company might borrow from a bank to kick start their business, and the return a lender receives for deferring the use of funds, by lending it to the borrower....
 if any, and the maturity date.






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A promissory note, also referred to as a note payable in accounting, is a contract
Contract

A contract is an exchange of promises between two or more parties to do, or refrain from doing, an act which is enforceable in a court of law. It is a binding legal agreement....
 where one party (the maker or issuer) makes an unconditional promise in writing to pay a sum of money
Money

Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are as a medium of exchange, a unit of account, and a store of value....
 to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. They differ from IOU
IOU (debt)

An IOU is a document acknowledging debt. The term is derived from the opening phrase "I owe unto" and/or the pronunciation of "I owe you". An IOU differs from a promissory note in not specifying the time of repayment....
s in that they contain a specific promise to pay, rather than simply acknowledging that a debt exists.

The terms of a note typically include the principal amount, the interest rate
Interest rate

An interest rate is the price a borrower pays for the use of money they do not own, for instance a small company might borrow from a bank to kick start their business, and the return a lender receives for deferring the use of funds, by lending it to the borrower....
 if any, and the maturity date. Sometimes, provisions are included concerning the payee's rights in the event of a default
Default (finance)

In 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....
, 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. In the United States
United States

The United States of America is a Federal government constitutional republic comprising U.S. state and a federal district. The country is situated mostly in central North America, where its Contiguous United States and Washington, D.C., the Capital districts and territories, lie between the Pacific Ocean and Atlantic Oceans, Borders of the U...
, a promissory note that meets certain conditions is a negotiable instrument
Negotiable instrument

A negotiable instrument is a specialized type of "contract" for the payment of money that is unconditional and capable of transfer by negotiation....
 regulated by article 3 of the Uniform Commercial Code
Uniform Commercial Code

File:Uniformcommercialcode.jpgFile:Uniformcommercialcodeconfidentialdrafts.jpgThe Uniform Commercial Code 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 U.S....
. Negotiable promissory notes are used extensively in combination with mortgage
Mortgage

A mortgage is the transfer of an interest in property to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it is the lender's security for a debt....
s in the financing of real estate
Real estate

Real estate is a law term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is fixed in location. transactions. Promissory notes, or commercial papers
Commercial paper

In the global money market, commercial paper is an Unsecured debt promissory note with a fixed Maturity of one 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 corporation's promise to pay the face amou...
, are also issued to provide capital to businesses.

Historically, promissory notes have acted as a form of privately issued currency
Currency

A currency is a Medium of exchange, facilitating the trade of goods and/or Service s. It is coins and paper bills used as money. It is one form of money, where money is anything that serves as a medium of exchange, a store of value, and a standard of value....
. In many jurisdictions today, bearer negotiable promissory notes are illegal because they can act as an alternative currency
Alternative currency

Alternative currency is a term that refers to any currency used as an alternative to the dominant national or multinational currency systems . Alternative currencies can be created by an individual, corporation, or organization, they can be created by national, state, or local governments, or they can arise naturally as people begin to use a...
. All Scottish and Northern Irish banknotes are essentially standardized promissory notes payable on demand.

See also

  • Bank note
  • Treasury note
  • Commercial note
  • Bond (finance)
    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 and/or to repay the principal at a later date, termed Maturity ....
  • Credit card
    Credit card

    A credit card is part of a system of payments named after the small plastic card issued to users of the system. It is a card entitling its holder to buy goods and services based on the holders promise to pay for these goods and services....
  • Letter of credit
    Letter of credit

    A letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking to a beneficiary against complying documents as stated in the Letter of Credit....
  • Student loan
    Student loan

    Student loans are loan offered to students to assist in payment of the costs of professional education. These loans usually carry a lower interest rate than other loans and are usually issued by government....