Promissory Notes Explained

Author: Garry Crystal

Promissory notes are legally binding documents between a lender and a borrower of money. Promissory notes will come with terms and conditions similar to any other financial agreements or contracts. However, promissory notes do have certain specifications that may not be found in other financial agreements.

Basic Promissory Notes

Promissory notes are often used between individuals when sums of money are being lent and borrowed. These notes are often used by individuals and companies as a guarantee that money will be repaid on a specified date. However, promissory notes are usually unconditional agreements between the lender and the borrower.

The note may be used in connection with some other form of service but there is one difference with a promissory note; the agreed amount must be repaid even if the original service agreement or contract did not occur. Promissory notes are stand alone agreements and the principal promise of repayment is usually unconditional, which means they will need to be repaid regardless of whatever occurs between the lender and the borrower. However, promissory notes will have a set of terms and conditions within the agreement.

The Guarantees of a Promissory Note

As promissory notes are agreements between two people, the actual terms and conditions to be included can be set out in a discussion or in writing between the individuals. Most promissory notes are set out as written contracts but a verbal agreement regarding the terms and conditions can still be seen as binding.

There are certain specifications that should be included in promissory notes and as legal documents go they are not complicated documents full of legal jargon. As long as the document's terms and conditions are clearly defined and both understandable and agreeable by lender and borrower there should be no need to seek legal expertise. However, where large sums of money are concerned it may be a wise option to take some form of legal advice.

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Details in a Promissory Note

There will of course be some differences depending on the exact terms and conditions of the promissory note. There are details that will be used in all promissory notes and these will include:

The name of the lender and the borrower.
The address of the borrower.
The principal amount of money.
The length of the loan period.
Whether or not interest is to be charged and the interest rates.
Information on defaults and penalties.
Whether or not the loan will be secured or unsecured. Signatures and witness signatures.

This list is not definitive and there are terms and conditions that can be set in place by both the lender and the borrower. These can include specific terms regarding repayments such as compounded interest.

Your situation may be slightly different. ask a question below ↓ and our editorial team will reply with our advice.

Unfair Terms

If there are any unclear clauses or one party signed the note under any form of duress then the document may not be enforced if a dispute reaches the law courts. Similarly, if there is any form of unbalance in the note that is biased towards one person, or any of the terms seem unfair, such as extremely high interest rates, then the note may not be enforceable.

Signatures

Once all of the terms and conditions have been accepted then the final act will be to sign the note. The lender should keep this note until all monies have been repaid and the agreement has reached its conclusion.

Promissory notes are sometimes known as IOUs or loan notes and the basic principle behind all of these terms is the same. A promise has been made to repay money and this promise can be legally enforced. It is in the best interests of the lender to always read the terms and conditions of any financial contract before signing any binding document.

The Next Step

Now that you have read through the advice above, you might want to put it into practice. Our Contract Red Flag Checker lets you describe a contract you are about to sign and get a plain English summary of the clauses that could hurt you. Takes about 2 minutes. Try it now →

14 questions

Ask Contracts and Agreements a Question

tree 17/06/2017 at 4:46 am

what good is a promissory note to me when my deceased grandpa signed and completed paying off his mortgage loan on time.. that happened in the year 1975

Velj 22/11/2016 at 4:34 pm

I loaned someone some money for a business venture. Although he had a Ltd company, he was a sole Director with no staff. In order to cover myself in case he dissolved the company, I ensured I made the note out to him as an individual as well as giving the company name and address. I also made sure the signature was in his name with no reference to his capacity as a Director etc. My brief research shows that, given the above, he cannot escape liability for the loan, having now dissolved the company.

Thoughts appreciated

Thanks

Cat 20/10/2016 at 9:12 am

As Sara asked above does a promissory note have to be witnessed by anyone including solicitors our notarised to be enforceable..?

Diddy 02/09/2016 at 10:40 pm

I sold 24 shares in my company to an individual in 2002. In 2005 I decided to let the individual and his colleague take control of my company by way of a majority shareholding. After carrying out a due diligence on my company the two new directors/shareholders decided to take over the management of the company and I became a 30% shareholder. With the company under my co-directors control, the majority shareholder said he wanted me to sign a promissory note. I asked him what that was and he explained. He wanted me to sign that I owed him £40,000. I refused. He then told me he would close the whole company down and I would be out of a job. I still refused so he assured me he wouldn't take the money off me personally but out of the company by way of dividends but his accountants had told him I had to sign this document anyway. I had been ill and under considerable stress during the transition so felt forced to sign especially given his assurance that the money wouldn't be taken from me. I reluctantly agreed. It was due to be repaid in May 2010 and sure enough their solicitor wrote to me reminding me of the debt. I responded telling the solicitor he knew as well as I did that I was never loaned any money and he and his client should be ashamed of themselves. As the promissory note was signed as a deed, the statute of limitations is 12 years. My question is this: Can the so called lender issue a statutory demand for payment of this debt given I have disputed the entire amount?

ContractsAndAgreements Editor 10/06/2016 at 2:30 pm

You would need to seek legal advice regarding this.

Pip 10/06/2016 at 12:05 pm

My parents have a promissory note drawn up a solicitor for moonrise lent to an uncle, (£50% of cost to buy his property). The note states amount to be be paid within 20 years and to accrue annual interest each year at a rate that was applicable of the date of signing, or they get paid the money upon the sale of the property or his death and from his estate. It is now 27 years later, nothing has been paid at all, is the note still valid, can they still request the money or get this upon his death?

J 22/01/2016 at 2:50 pm

I have lent a company £18000 on a one year term, and have a 'Loan Note 'after 15 months l received half back with interest. with promise to pay the final redemption payment a month after which I never received. Now after an approximate 18+ months, emails and phone calls (some answered some not) and a letter to bear with them till the end of OCTOBER/15.

And more broken promised dates of payment.

What is my legal position, and welcomed advice
Kind regards

Jim

Sarah 06/08/2014 at 10:26 am

Does a promissory note have to be notarised or signed in front of a solicitor so that it can be used in a UK court of law?

Vince 29/10/2013 at 2:34 pm

I made out a promissionary note where i gave £30k to a friend. In the note it stated that if the full payment is not made within 3 months i will take charge of his property which he has rented out.
He has not paid the amount what is the next step?

mac 10/09/2013 at 3:15 pm

Is money is a promissory note?if not why does it say i promise to pay the bearer on demand of the sum???

uncle1 03/01/2013 at 6:43 pm

Can you exchange Promissory Notes wtih the likes of HMRC and local authorities over tax bills, council tax etc.? and also what happens if the lender/etc refuse the Note? can the outstanding debt/bill be called into question if they do?

ContractsAndAgreements 29/06/2011 at 11:38 am

Promisory notes are legally binding documents between a lender and a borrower of money. As your friends agreed to repay the money you lent them, this "promise" can be legally enforced. You should contact a solicitor as soon as possible to get a clearer idea of your position and how you should move forward.

Starfish 28/06/2011 at 11:28 pm

Looking for some help. We lent some friends of ours £14,000 a few years ago of which they signed two promissory notes, one for £4,200 and one for £9,800, which would be paid back at £200 per month. In January 2011 they stopped making the payments. The total they had paid back to January was £4,000. The notes were signed by both parties, no Interest to be charged as they were good friends at the time. However, there were clauses that should they default then the full monies have to be paid along with any legal costs. We are in the process of writing to them giving them 7 days to reply before we seek court action. We expect they are going to claim they can't pay it. Where do we stand?? Can anyone help or advise what to do. Your help would be greatly appreciated.

David 06/06/2011 at 10:07 am

A very clear and concise guide to the basics of a Promissory Note. The lack of jargon appreciated (though as a retired paralegal, I do understand most of it myself!).An example Note could be a useful addition, though obviously you cannot reasonably cover all the options.

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