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What is a 'Promissory Note'

A promissory note is a financial instrument that contains a written promise by one party to pay another party a definite sum of money either on demand or at a specified future date. A promissory note typically contains all the terms pertaining to the indebtedness by the issuer or maker to the note's payee, such as the amount, interest rate, maturity date, date and place of issuance, and issuer's signature.

BREAKING DOWN 'Promissory Note'

The 1930 international convention that governs promissory notes and bills of exchange also stipulates that the term "promissory note" should be inserted in the body of the instrument and should contain an unconditional promise to pay.

Promissory notes lie somewhere between the informality of an IOU and the rigidity of a loan contract in terms of their legal enforceability. A promissory note includes a specific promise to pay, but an IOU merely acknowledges that a debt exists. A loan contract, on the other hand, usually states the lender’s right to recourse – such as foreclosure – in the event of default by the borrower; such provisions are generally absent in a promissory note.

Promissory notes that are unconditional and saleable become negotiable instruments that are extensively used in business transactions in numerous countries.

A promissory note is usually held by the payee. Once the debt has been discharged, it must be canceled by the payee and returned to the issuer.

Student Loan Promissory Notes

Many university students sign their first promissory notes before they receive their federal or private student loans. Private student loan lenders typically require students sign promissory notes for each loan that they borrow. Some schools, however, allow federal student loan borrowers to sign a one-time, master promissory note. After signing the master promissory note, the student borrower can receive multiple federal student loan disbursements as long as the school certifies the student's continued eligibility for federal loans.

Student loan promissory notes outline rights and responsibilities of student borrowers as well as the conditions and terms of the loan. By signing a master promissory note for federal student loans, for instance, the student promises to repay the loan amounts plus interest and fees to the U.S. Department of Education. The master promissory note also includes the student's personal contact information and employment information as well as the names and contact information for the student's personal references.

Mortgage vs. Promissory Note

Home buyers sign a promissory note that includes a promise to repay their mortgage and repayment terms. The promissory note includes the amount of the loan, the interest rate and late fees. The lender holds the promissory note until the mortgage loan is paid off. The promissory note differs from the deed of trust or mortgage because it is not recorded in the county land records.

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