What Is a Promissory Note With an Example?

A promissory note is a financial document formalizing a commitment between parties. It outlines a borrower’s promise to repay a specific sum to a lender. This agreement establishes clear repayment terms, providing financial clarity.

It serves various lending scenarios, from personal arrangements to business transactions. It documents the debt, preventing misunderstandings. While similar to other debt instruments, a promissory note has distinct characteristics.

Defining a Promissory Note

A promissory note is a legally binding agreement where the “maker” or “borrower” promises to pay a specific sum to the “payee” or “lender.” It formalizes loan terms and repayment obligations. It is more structured than an “IOU” but less extensive than a full loan contract.

Its purpose is to delineate financial obligations and rights of both parties. It is used in situations like personal loans, student loans, or business financing. It enables non-traditional lenders, including individuals or companies, to provide financing, expanding lending opportunities.

Essential Elements of a Promissory Note

For legal enforceability, a promissory note must contain specific components. It identifies the full names and addresses of both the maker (borrower) and the payee (lender). It includes the principal amount, the exact sum borrowed. If applicable, the interest rate must be stated, specifying calculation and application.

Payment terms, including installment or lump sum payments, and a detailed schedule with due dates and amounts, are also included. The maturity date, the final repayment deadline, is included. Terms of default specify consequences for missed payments, such as late fees or increased interest rates. If secured, it describes the collateral, an asset pledged by the borrower that the lender can claim upon default. Finally, signatures of both maker and payee, along with the date of issuance, confirm agreement and establish legal validity.

Common Types of Promissory Notes

Promissory notes come in various forms for different lending scenarios. A simple promissory note is the most basic, outlining the amount owed and repayment terms. Often used for personal loans, they may or may not include interest.

A demand promissory note has no fixed maturity date; the lender can demand repayment at any time, usually with reasonable notice. This offers flexibility for business transactions or short-term financing.

Notes are also categorized as secured or unsecured. A secured note is backed by collateral, like real estate or a vehicle, which the lender can seize upon default. This protects the lender. An unsecured note does not involve collateral; the lender relies solely on the borrower’s creditworthiness. These are often used for smaller loans or between trusted parties.

Understanding the Promissory Note Process

Signing a promissory note has significant legal implications. When signed, the borrower formally commits to repaying the specified amount under the outlined terms, making it legally binding. A properly executed note is enforceable in court, providing legal recourse if the borrower fails obligations.

During repayment, the borrower makes scheduled payments, either in installments or a lump sum. The lender retains the note until the loan is satisfied. If a borrower defaults by missing payments or breaching terms, the lender issues a formal notice of default, offering a chance to cure. If default persists, the lender can demand accelerated repayment, seize collateral if secured, or initiate legal action. Remedies may include wage garnishment or property liens, depending on laws.

A promissory note can be transferred or assigned, demonstrating its negotiability. The lender can sell or transfer rights in the note to a third party, often via endorsement or assignment. The new holder gains the right to collect payments, and the borrower remains bound by the note’s terms.

Illustrative Promissory Note Example

PROMISSORY NOTE

Principal Amount: $15,000.00 USD
Date of Issuance: August 21, 2025

FOR VALUE RECEIVED, the undersigned, Borrower: Jane Doe, residing at 123 Main Street, Anytown, USA, 12345 (hereinafter “Maker”), unconditionally promises to pay to the order of Lender: John Smith, residing at 456 Oak Avenue, Anytown, USA, 12345 (hereinafter “Payee”), the principal sum of Fifteen Thousand and 00/100 U.S. Dollars ($15,000.00), together with interest at the rate of six percent (6%) per annum on the unpaid principal balance.

Payment Terms:
Payments of principal and accrued interest shall be made in thirty-six (36) equal monthly installments of Four Hundred Forty-Three and 21/100 U.S. Dollars ($443.21). The first payment shall be due on September 21, 2025, and subsequent payments shall be due on the 21st day of each month thereafter until the entire principal and interest are paid in full. All payments shall be made to the Payee at the address listed above, or at such other address as the Payee may designate in writing.

Maturity Date: August 21, 2028.

Default:
If any payment due under this Note is not received within ten (10) days of its due date, the Maker shall be in default. Upon default, the entire unpaid principal balance of this Note, together with all accrued interest and any applicable late fees, shall become immediately due and payable at the option of the Payee without prior notice or demand. The Maker agrees to pay all costs of collection, including reasonable attorney’s fees, incurred by the Payee in enforcing this Note.

Governing Law: This Promissory Note shall be governed by and construed in accordance with the laws of the United States, generally applicable to contracts entered into and to be performed entirely within its jurisdiction, without regard to conflict of laws principles.

Signatures:

Maker:
_________________________
Jane Doe
Date: August 21, 2025

Payee:
_________________________
John Smith
Date: August 21, 2025