A promissory note is a debt instrument that lets companies and individuals get financing without needing a bank. This would be any individual or a company willing to carry the note (and provide financing) under the agreed-upon terms. Basically, anyone can be a lender.

A promissory note typically contains the following pertinent information regarding the loan:

  • The parties involved (issuer and payee)
  • The principal amount
  • Interest rate
  • Maturity date
  • How the debt will be paid
  • Consequences for non-payment or default in payment
  • Date and place of issuance
  • Issuer’s signature.

This type of instrument adds weight to an informal handshake between friends, or your cousin’s IOU on a bar napkin. A promissory note is one of a variety of business services that Mr. Maccari offers to his business clients. There are 4 basic types of promissory notes. We will go into the details of each one here.

Due On-Demand Or Default Promissory Note.

This type of promissory note is best to be used between family and friends. It’s that step up from the IOU on a bar napkin we mentioned. This is one of the types of promissory notes best for small loans. Helping your friend buy a moped, or your sister get her cookie business started.

There is no specific date set for when it is due, this lets your sister or friend make good on the loan when they are financially able. There are usually no or low-interest rates.

The big drawback to this type of promissory note is that it may not get paid. You might feel as if your friend or family member has taken advantage of your good nature. There must be a strong foundation of trust between lender and borrower. And as the lender, you need to allow for the fact that you might not get your money back. If you feel this will negatively impact the relationship, don’t do it.

Due On A Specific Date Promissory Note.

This is one of the types of promissory notes that are to the point. It demands the repayment of a loan or debt before a specific date. Use this promissory note when loaning small amounts of money. Like when your roommate’s car breaks down and he needs a few hundred dollars to repair the transmission.

Be sure the person you are lending it to will be solvent enough to make the payment on time. That way you can avoid uncomfortable silences at the dinner table.

Installment Payment Promissory Note.

This is one of those types of promissory notes used when you need to buy something more expensive. When you need to replace your stove or living room furniture is when a promissory note like this is useful. This type of loan can have a higher interest rate attached to it, so buyers beware.

A down payment to reduce the interest amount is typically made. Payments are then divvied up into equal monthly installments including the agreed-upon interest. Once the principal is paid, the debt is discharged. This makes it easier to agree to terms of payment that you can afford.

Installment Payment With a Final Balloon Payment Promissory Note.

A mortgage is a good example of these types of promissory notes. If you are short on cash but expect to refinance or pay off the loan in the future, this note is ideal. The interest rate on this promissory note is usually lower. The principal including interest is paid in equal and consecutive installments. In the end, the loan can be reset or the balance due is paid off (the balloon payment).

We Can Help!

To learn the finer detail of how a promissory note works, call the Law Office of Thomas J. Maccari. We have a long list of satisfied clients who always call on Mr. Maccari for all their legal service needs. We are located in Boca Raton and serve the businesses and residents of Broward and Palm Beach county with pride. Click here or give us a call at (561) 982-9772.

Promissory Note – The 4 Types And Their Uses.