promissory note

promissory note

promissory note, unconditional written promise to pay a certain sum of money at a definite time to bearer or to a specified person on his order. Promissory notes are generally used as evidence of debt. The holder of a note made payable to bearer may transfer his rights to another by delivery of the note. If the note is payable to order, it may be transferred by endorsement and delivery.

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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A promissory note, also referred to as a note payable in accounting, is a contract where one party (the maker or issuer) makes an unconditional promise in writing to pay a sum of money 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 IOUs 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 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.

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