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A promissory note, sometimes referred to as a note payable, is a
legal instrument Legal instrument is a law, legal term of art that is used for any formally executed written document that can be formally attributed to its author, records and formally expresses a legally enforceable act, process, or contractual duty, obligation ...
(more particularly, a financing instrument and a
debt Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...
instrument), in which one party (the ''maker'' or ''issuer'') promises in writing to pay a determinate sum of
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: m ...
to the other (the ''payee''), subject to any terms and conditions specified within the document.


Overview

The terms of a note typically include the principal amount, the
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...
if any, the parties, the date, the terms of repayment (which could include interest) and the
maturity date Maturity or immaturity may refer to: * Adulthood or age of majority * Maturity model ** Capability Maturity Model, in software engineering, a model representing the degree of formality and optimization of processes in an organization * Developme ...
. Sometimes, provisions are included concerning the payee's rights in the event of a default, which may include
foreclosure Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has Default (finance), stopped making payments to the lender by forcing the sale of the asset used as the Collateral (finance), coll ...
of the maker's assets. In foreclosures and contract breaches, promissory notes under CPLR 5001 allow creditors to recover prejudgement interest from the date interest is due until liability is established. For loans between individuals, writing and signing a promissory note are often instrumental for tax and record keeping. A promissory note alone is typically unsecured.


Terminology

The term note payable is commonly used in
accounting Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...
(as distinguished from
accounts payable Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a company's balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents. An accounts payable ...
) or commonly as just a "note", it is internationally defined by the ''Convention providing a uniform law for bills of exchange and promissory notes'', but regional variations exist. A
banknote A banknote or bank notealso called a bill (North American English) or simply a noteis a type of paper money that is made and distributed ("issued") by a bank of issue, payable to the bearer on demand. Banknotes were originally issued by commerc ...
is frequently referred to as a promissory note, as it is made by a bank and payable to bearer on demand.
Mortgage note In the United States, a mortgage note (also known as a ''real estate lien note'', ''borrower's note'') is a promissory note secured by a specified mortgage loan. Mortgage notes are a written promise to repay a specified sum of money plus interest ...
s or real estate notes are other forms of promissory note. A promissory note is said to be a
negotiable instrument A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a ...
when it contains an unconditional promise. 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. Promissory notes may be used in combination with
security agreement A security agreement, in the law of the United States, is a contract that governs the relationship between the parties to a kind of financial transaction known as a secured transaction. In a secured transaction, the Grantor (typically a borrower b ...
s. For example, a promissory note may be used in combination with a
mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...
, in which case it is called a
mortgage note In the United States, a mortgage note (also known as a ''real estate lien note'', ''borrower's note'') is a promissory note secured by a specified mortgage loan. Mortgage notes are a written promise to repay a specified sum of money plus interest ...
.


Loan contracts

In common speech, other terms, such as "
loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...
", "
loan agreement A loan agreement (also known as a lending agreement) is a contract between a borrower and a lender which regulates the mutual promises made by each party. There are many types of loan agreements, including "facilities agreements", "Revolving credi ...
", and "loan contract" may be used interchangeably with "promissory note". The term "loan contract" is often used to describe a contract that is lengthy and detailed. A promissory note is very similar to a loan. Each is a legally binding contract to unconditionally repay a specified amount within a defined time frame. However, a promissory note is generally less detailed and less rigid than a loan contract. For one thing, loan agreements often require repayment in installments, while promissory notes typically do not. Furthermore, a loan agreement usually includes the terms for recourse in the case of default, such as establishing the right to foreclose, while a promissory note does not.


Difference from IOU

Promissory notes differ from
IOU An IOU (Abbreviation, abbreviated from the phrase "I owe you") is usually an informal document acknowledging debt. An IOU differs from a promissory note in that an IOU is not a negotiable instrument and does not specify repayment terms such as th ...
s in that they contain a specific promise to pay along with the steps and timeline for repayment as well as consequences if repayment fails. IOUs only acknowledge that a debt exists.


Negotiability

Negotiable instrument A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a ...
s are unconditional and impose few to no duties on the issuer or payee other than payment. In the United States, whether a promissory note is a negotiable instrument can have significant legal impacts, as only negotiable instruments are subject to Article 3 of the Uniform Commercial Code and the application of the
holder in due course In commercial law, a holder in due course (HDC) is someone who takes a negotiable instrument in a value-for-value exchange without reason to doubt that the instrument will be paid. If the instrument is later found not to be payable as written, a ho ...
rule.Whaley DJ. (2012)
Mortgage Foreclosures, Promissory Notes, and the Uniform Commercial Code
. ''Western State University Law Review''
LexisNexis entry
The negotiability of
mortgage note In the United States, a mortgage note (also known as a ''real estate lien note'', ''borrower's note'') is a promissory note secured by a specified mortgage loan. Mortgage notes are a written promise to repay a specified sum of money plus interest ...
s has been debated, particularly due to the obligations and "baggage" associated with mortgages; however, in mortgages notes are often determined to be negotiable instruments. In the United States, the Non-Negotiable Long Form Promissory Note is not required.


Use as financial instruments

Promissory notes are a common financial instrument in many jurisdictions, employed as
commercial paper Commercial paper, in the global financial market, is an Unsecured debt, unsecured promissory note with a fixed Maturity (finance), maturity of usually less than 270 days. In layperson terms, it is like an "IOU" but can be bought and sold becaus ...
principally for the short time financing of companies. Often, the seller or provider of a service is not paid upfront by the buyer (usually, another company), but within a period of time, the length of which has been agreed upon by both the seller and the buyer. The reasons for this may vary; historically, many companies used to balance their books and execute payments and debts at the end of each week or tax month; any product bought before that time would be paid only then. Depending on the jurisdiction, this deferred payment period can be regulated by law; in countries like
France France, officially the French Republic, is a country located primarily in Western Europe. Overseas France, Its overseas regions and territories include French Guiana in South America, Saint Pierre and Miquelon in the Atlantic Ocean#North Atlan ...
,
Italy Italy, officially the Italian Republic, is a country in Southern Europe, Southern and Western Europe, Western Europe. It consists of Italian Peninsula, a peninsula that extends into the Mediterranean Sea, with the Alps on its northern land b ...
or
Spain Spain, or the Kingdom of Spain, is a country in Southern Europe, Southern and Western Europe with territories in North Africa. Featuring the Punta de Tarifa, southernmost point of continental Europe, it is the largest country in Southern Eur ...
, it usually ranges between 30 and 90 days after the purchase. When a company engages in many of such transactions, for instance by having provided services to many customers all of whom then deferred their payment, it is possible that the company may be owed enough money that its own liquidity position (i.e., the amount of cash it holds) is hampered, and finds itself unable to honour their own debts, despite the fact that by the books, the company remains solvent. In those cases, the company has the option of asking the bank for a short-term loan, or using any other such short-term financial arrangements to avoid
insolvency In accounting, insolvency is the state of being unable to pay the debts, by a person or company ( debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet i ...
. However, in jurisdictions where promissory notes are commonplace, the company (called the ''payee'' or ''lender'') can ask one of its debtors (called the ''maker'', ''borrower'' or ''payor'') to ''accept'' a promissory note, whereby the maker signs a legally binding agreement to honour the amount established in the promissory note (usually, part or all its debt) within the agreed period of time. The lender can then take the promissory note to a financial institution (usually a bank, albeit this could also be a private person, or another company), that will exchange the promissory note for cash; usually, the promissory note is cashed in for the amount established in the promissory note, less a small discount. Once the promissory note reaches its ''maturity date'', its current holder (the bank) can execute it over the emitter of the note (the debtor), who would have to pay the bank the amount ''promised'' in the note. If the maker fails to pay, however, the bank retains the right to go to the company that cashed the promissory note in, and demand payment. In the case of unsecured promissory notes, the lender accepts the promissory note based solely on the maker's ability to repay; if the maker fails to pay, the lender must honour the debt to the bank. In the case of a secured promissory note, the lender accepts the promissory note based on the maker's ability to repay, but the note is secured by a thing of value; if the maker fails to pay and the bank reclaims payment, the lender has the right to execute the security.


Use as private money

Thus, promissory notes can work as a form of private money. In the past, particularly during the 19th century, their widespread and unregulated use was a source of great risk for banks and private financiers, who would often face the insolvency of both debtors, or simply be scammed by both.


History

Code of Hammurabi Law 100 stipulated repayment of a
loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...
by a
debtor A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this ...
to a
creditor A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some propert ...
on a
schedule A schedule (, ) or a timetable, as a basic time-management tool, consists of a list of times at which possible tasks, events, or actions are intended to take place, or of a sequence of events in the chronological order in which such thing ...
with a
maturity date Maturity or immaturity may refer to: * Adulthood or age of majority * Maturity model ** Capability Maturity Model, in software engineering, a model representing the degree of formality and optimization of processes in an organization * Developme ...
specified in
written Writing is the act of creating a persistent representation of language. A writing system includes a particular set of symbols called a ''script'', as well as the rules by which they encode a particular spoken language. Every written language ...
contractual term A contractual term is "any provision forming part of a contract". Each term gives rise to a contractual obligation, the breach of which may give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as ...
s. Law 122 stipulated that a
depositor A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings account A savings account is a bank account at a retail banking, retail bank. Commo ...
of
gold Gold is a chemical element; it has chemical symbol Au (from Latin ) and atomic number 79. In its pure form, it is a brightness, bright, slightly orange-yellow, dense, soft, malleable, and ductile metal. Chemically, gold is a transition metal ...
,
silver Silver is a chemical element; it has Symbol (chemistry), symbol Ag () and atomic number 47. A soft, whitish-gray, lustrous transition metal, it exhibits the highest electrical conductivity, thermal conductivity, and reflectivity of any metal. ...
, or other chattel/movable property for
safe A safe (also called a strongbox or coffer) is a secure lockable enclosure used for securing valuable objects against theft or fire. A safe is usually a hollow cuboid or cylinder, with one face being removable or hinged to form a door. The body ...
keeping must present all articles and a signed contract of
bailment Bailment is a legal relationship in common law, where the owner of personal property ("chattel") transfers physical possession of that property to another, who holds the property for a certain purpose, but retains ownership. The owner who sur ...
to a
notary A notary is a person authorised to perform acts in legal affairs, in particular witnessing signatures on documents. The form that the notarial profession takes varies with local legal systems. A notary, while a legal professional, is distin ...
before depositing the articles with a
banker A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...
, and Law 123 stipulated that a banker was discharged of any liability from a contract of bailment if the notary denied the existence of the contract. Law 124 stipulated that a depositor with a notarized contract of bailment was entitled to redeem the entire value of their deposit, and Law 125 stipulated that a banker was
liable In law, liable means "responsible or answerable in law; legally obligated". Legal liability concerns both civil law and criminal law and can arise from various areas of law, such as contracts, torts, taxes, or fines given by government agencie ...
for replacement of deposits stolen while in their possession. In China during the
Han dynasty The Han dynasty was an Dynasties of China, imperial dynasty of China (202 BC9 AD, 25–220 AD) established by Liu Bang and ruled by the House of Liu. The dynasty was preceded by the short-lived Qin dynasty (221–206 BC ...
promissory notes appeared in 118 BC and were made of leather. The Romans may have used promissory notes in 57 AD as a durable lightweight substance as evidence of a promise in that time has been found in London among the Bloomberg tablets.
Carthage Carthage was an ancient city in Northern Africa, on the eastern side of the Lake of Tunis in what is now Tunisia. Carthage was one of the most important trading hubs of the Ancient Mediterranean and one of the most affluent cities of the classic ...
was purported to have issued lightweight promissory notes on parchment or leather before 146 BC. In China during the
Han dynasty The Han dynasty was an Dynasties of China, imperial dynasty of China (202 BC9 AD, 25–220 AD) established by Liu Bang and ruled by the House of Liu. The dynasty was preceded by the short-lived Qin dynasty (221–206 BC ...
promissory notes appeared in 118 BC and were made of leather. The Romans may have used promissory notes in 57 AD as a durable lightweight substance as evidence of a promise in that time has been found in London among the Bloomberg tablets. Historically, promissory notes have acted as a form of privately issued
currency A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a ''system of money'' in common use within a specific envi ...
. Flying cash or ''feiqian'' was a promissory note used during the
Tang dynasty The Tang dynasty (, ; zh, c=唐朝), or the Tang Empire, was an Dynasties of China, imperial dynasty of China that ruled from 618 to 907, with an Wu Zhou, interregnum between 690 and 705. It was preceded by the Sui dynasty and followed ...
(618 – 907). Flying cash was regularly used by Chinese tea merchants, and could be exchanged for hard currency at provincial capitals. The Chinese concept of promissory notes was introduced by Marco Polo to Europe. According to tradition, in 1325 a promissory note was signed in
Milan Milan ( , , ; ) is a city in northern Italy, regional capital of Lombardy, the largest city in Italy by urban area and the List of cities in Italy, second-most-populous city proper in Italy after Rome. The city proper has a population of nea ...
. However, according to a travelogue of a visit to Prague in 960 by
Ibrahim ibn Yaqub Ibrahim ibn Yaqub ( ''Ibrâhîm ibn Ya'qûb al-Ṭarṭûshi'' or ''al-Ṭurṭûshî''; , ''Avraham ben Yaʿakov''; 961–62) was a 10th-century Hispano-Arabic, Sephardi Jewish traveler, probably a merchant, who may have also engaged in diploma ...
, small pieces of cloth were used as a means of trade, with these cloths having a set exchange rate versus silver. Around 1150 the
Knights Templar The Poor Fellow-Soldiers of Christ and of the Temple of Solomon, mainly known as the Knights Templar, was a Military order (religious society), military order of the Catholic Church, Catholic faith, and one of the most important military ord ...
issued promissory notes to pilgrims, pilgrims deposited their valuables with a local Templar preceptory before embarking, received a document indicating the value of their deposit, then used that document upon arrival in the Holy Land to retrieve their funds in an amount of treasure of equal value. Around 1348 in
Görlitz Görlitz (; ; ; ; ; Lusatian dialects, East Lusatian: , , ) is a town in the Germany, German state of Saxony. It is on the river Lusatian Neisse and is the largest town in Upper Lusatia, the second-largest town in the region of Lusatia after ...
, Germany, the Jewish creditor Adasse owned a promissory note for 71 marks. There is also evidence of promissory notes being issued in 1384 between
Genoa Genoa ( ; ; ) is a city in and the capital of the Italian region of Liguria, and the sixth-largest city in Italy. As of 2025, 563,947 people live within the city's administrative limits. While its metropolitan city has 818,651 inhabitan ...
and
Barcelona Barcelona ( ; ; ) is a city on the northeastern coast of Spain. It is the capital and largest city of the autonomous community of Catalonia, as well as the second-most populous municipality of Spain. With a population of 1.6 million within c ...
, although the letters themselves are lost. The same happens for the ones issued in Valencia in 1371 by Bernat de Codinachs for Manuel d'Entença, a merchant from
Huesca Huesca (; ) is a city in north-eastern Spain, within the Autonomous communities of Spain, autonomous community of Aragon. It was the capital of the Kingdom of Aragon between 1096 and 1118. It is also the capital of the Spanish Huesca (province), ...
(then part of the
Crown of Aragon The Crown of Aragon (, ) ;, ; ; . was a composite monarchy ruled by one king, originated by the dynastic union of the Kingdom of Aragon and the County of Barcelona (later Principality of Catalonia) and ended as a consequence of the War of the Sp ...
), amounting a total of 100 florins. In all these cases, the promissory notes were used as a rudimentary system of paper money, for the amounts issued could not be easily transported in metal coins between the cities involved. Ginaldo Giovanni Battista Strozzi issued an early form of promissory note in
Medina del Campo Medina del Campo is a town and municipality of Spain located in the autonomous community of Castile and León. Part of the Province of Valladolid, it is the centre of a farming area. It lies on the banks of the Zapardiel river, in the centre of t ...
(
Spain Spain, or the Kingdom of Spain, is a country in Southern Europe, Southern and Western Europe with territories in North Africa. Featuring the Punta de Tarifa, southernmost point of continental Europe, it is the largest country in Southern Eur ...
), against the city of
Besançon Besançon (, ; , ; archaic ; ) is the capital of the Departments of France, department of Doubs in the region of Bourgogne-Franche-Comté. The city is located in Eastern France, close to the Jura Mountains and the border with Switzerland. Capi ...
in 1553. However, there exists notice of promissory notes being in used in Mediterranean commerce well before that date. In 2005, the Korean Ministry of Justice and a consortium of financial institutions announced the service of an electronic promissory note (eNote) service, after years of development, allowing entities to make promissory notes (notes payable) in business transactions digitally instead of on paper, for the first time in the world. In the United States, eNotes were made possible as a result of the
Electronic Signatures in Global and National Commerce Act The Electronic Signatures in Global and National Commerce Act (ESIGN, , ) is a United States federal law, passed by the U.S. Congress to facilitate the use of electronic records and electronic signatures in interstate and foreign commerce. T ...
in 2000 and the
Uniform Electronic Transactions Act The Uniform Electronic Transactions Act (UETA) is one of the several United States Uniform Acts proposed by the National Conference of Commissioners on Uniform State Laws (NCCUSL). Forty-nine states, the District of Columbia, and the U.S. Virgin ...
(UETA). An eNote must meet all the requirements to be a written promissory note.


International law

In 1930, under the League of Nations, a ''Convention providing a uniform law for bills of exchange and promissory notes'' was drafted and ratified by eighteen nations. Article 75 of the treaty stated that a promissory note shall contain: * the term "''promissory note''" inserted in the body of the instrument and expressed in the language employed in drawing up the instrument * an unconditional promise to pay a determinate sum of money; * a statement of the time of payment; * a statement of the place where payment is to be made; * the name of the person to whom or to whose order payment is to be made; * a statement of the date and of the place where the promissory note is issued; * the signature of the person who issues the instrument (maker).


Worldwide


England and Wales


United States

In the
United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...
, a promissory note that meets certain conditions is a
negotiable instrument A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a ...
regulated by article 3 of the
Uniform Commercial Code The Uniform Commercial Code (UCC), first published in 1952, is one of a number of uniform acts that have been established as law with the goal of harmonizing the laws of sales and other commercial transactions across the United States through U ...
. Negotiable promissory notes called
mortgage note In the United States, a mortgage note (also known as a ''real estate lien note'', ''borrower's note'') is a promissory note secured by a specified mortgage loan. Mortgage notes are a written promise to repay a specified sum of money plus interest ...
s are used extensively in combination with
mortgages A mortgage loan or simply mortgage (), in civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any pur ...
in the financing of real estate transactions. One prominent example is the
Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New ...
model
standard form contract A standard form contract (sometimes referred to as a ''contract of adhesion,'' a ''leonine contract'', a ''take-it-or-leave-it contract'', or a '' boilerplate contract'') is a contract between two parties, where the terms and conditions of the co ...
Multistate Fixed-Rate Note 3200, which is publicly available. Promissory notes, or
commercial paper Commercial paper, in the global financial market, is an Unsecured debt, unsecured promissory note with a fixed Maturity (finance), maturity of usually less than 270 days. In layperson terms, it is like an "IOU" but can be bought and sold becaus ...
s, are also issued to provide capital to businesses. However, promissory notes act as a source of finance to the company's creditors. The various State law enactments of the Uniform Commercial Code define what is and what is not a promissory note, in section 3-104(d): Thus, a writing containing such a disclaimer removes such a writing from the definition of ''negotiable instrument'', instead simply memorializing a
contract A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
.


See also

*
Bond (finance) In finance, a bond is a type of Security (finance), security under which the issuer (debtor) owes the holder (creditor) a debt, and is obliged – depending on the terms – to provide cash flow to the creditor (e.g. repay the principal (i.e. a ...
* Credit card *
Government bond A government bond or sovereign bond is a form of Bond (finance), bond issued by a government to support government spending, public spending. It generally includes a commitment to pay periodic interest, called Coupon (finance), coupon payments' ...
*
Letter of credit A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exp ...
, used for import-export business * Notes receivable *
Student loan A student loan is a type of loan designed to help students pay for post-secondary education and the associated fees, such as tuition, books and supplies, and living expenses. It may differ from other types of loans in the fact that the interest ...
* Warrant (of Payment)


References

{{DEFAULTSORT:Promissory Note Legal documents Negotiable instrument law Securities (finance) Interest-bearing instruments