Many of us have loaned money to a friend or family member with the promise of the loan being repaid only to wind up empty handed. The same may be true if you have given someone a car or expensive item with the expectation of being paid for the item. Whenever a lender provides a loan of money or exchange of personal property to a borrower, a Promissory Note (commonly referred to as an “I.O.U.”) should document the transaction in writing.

The Promissory Note is a legal document recording the details of a transaction and the lender / seller payment terms, thus creating a written commitment by the borrower to repay the loan or pay for an exchange of personal property. The transaction may be related to finances or personal property, such as a vehicle, art, furniture or any other personal item of monetary value. More specifically, the Promissory Note documents the money owed to the lender by the borrower in exchange of a financial loan or personal property. Since the Promissory Note is most often used for unsecured loans, it also may aid in the collection of money owed to the lender should the borrower default on their financial payment obligation.

Whether using the Promissory Note for a loan of money or personal property, the document will outline the total loan amount or item by the lender, any interest rate to be applied, payment schedule, any related fees (such as origination or late payment fees), and any collateral considerations. The lender may opt to create a detailed payment schedule to include both the principal and interest (an amortized installment) associated with repayment of the loan. A payment schedule of principal or interest only also may be used.

The Promissory Note payment schedule may vary, dependant upon the type of payment plan.

  • An installment loan is typically paid in equal payments for a specified period until the loan obligation is paid in full. Installment loans are usually paid on a monthly basis. An installment loan with a final balloon payment also may be used. Normal installment payments are made throughout the loan period with the final payment to include the remaining amount of any principal and / or interest.
  • A term loan may require the borrower to pay the loan obligation by a date specified by the lender.
  • An on demand loan enables the lender to demand payment from the borrower in full at any given time.

The lender may wish to include a Security Agreement if any property of the borrower is to be used as collateral. Collateral is used as security for payment of debt in the event the borrower defaults on scheduled payments.

While most contracts and written agreements offer an original executed and signed document to each party, the lender and borrower, the Promissory Note is different. The lender is obligated to retain the original signed Promissory Note until all repayment demands of the agreement are satisfied. Once the borrower satisfies the payment obligation, the lender may mark the original Promissory Note as “paid in full”, “satisfied”, or “canceled”. The lender also should sign and date the satisfied Promissory Note and provide a copy to the borrower.