Short-term credit instrument consisting of a written promise by one person to pay a specified amount of money to another on demand or at a given future date. Promissory notes were in use in Europe as early as the Renaissance. They are often negotiable and may be secured by the pledge of collateral. The instrument changed substantially during the 20th century, when various clauses were added regarding payment and other provisions—for example, authorizing the sale of collateral, permitting extensions of time, and allowing acceleration of payment in the event of default. Seealso bill of exchange.
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The terms of a note typically include the principal amount, the interest rate if any, and the maturity date. Sometimes there will be provisions concerning the payee's rights in the event of a default, 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 is often considered a good idea for tax and recordkeeping reasons. In the United States, a promissory note that meets certain conditions is a negotiable instrument governed by Article 3 of the Uniform Commercial Code. Negotiable promissory notes are used extensively in combination with mortgages in the financing of real estate transactions. Other uses of promissory notes include the capitalization of corporate finances through the issuance and transfer of commercial paper.
At various times in history, promissory notes have acted as a form of privately issued currency. In many jurisdictions today, bearer negotiable promissory notes are illegal precisely because they can act as an alternative currency. All Scottish and Northern Irish banknotes are effectively standardized demand promissory notes.