What Is a Promise-to-Pay Agreement?

A promise-to-pay agreement, also known as a promissory note, is a legally binding contract through which one party promises in writing or orally to pay a definite sum of money to another party at a specified date. The agreement delineates the terms that determine the specifics of the lending process.

Promise-to-pay agreements typically contain the debt amount, interest rate and the date of issuance. They are a necessary part of any type of loan. In the case of mortgage contracts, the agreement between the parties gives the lender the right to take the home of the borrower in case he doesn’t abide by the terms set in the agreement.

There are two types of promise-to-pay agreements: written and oral. A written agreement needs to contain information pertaining to the repayment schedule so that it can be used as proof in court if one of the parties breaks the terms. Because oral agreements are difficult, although not impossible, to prove in court, they are typically employed in cases where the lender can afford to lose the owed sum of money.

Under the Truth in Lending Act, through which the federal government regulates promise-to-pay agreements, lenders are required to provide a statement that precisely delineates the cost of the loan, the rights of the borrower and the way lenders can assess further charges, such as late fees.