Understanding a Promissory Note

A promissory note is a legally-binding promise to repay a specified amount over a specified period of time. It is a legal document which includes:

• A description of the debt. The key element of a promissory note, this is usually the first section and contains a detailed description of the debt, clearly identifying the borrower, lender, the loan amount, and the interest rate to be paid. The promissory note obliges the borrower to the debt, and the obligation becomes the borrower's personal liability.

• A description of the repayment plan. This section spells out the schedule of due dates and payment amounts to which the borrower is agreeing. Most payments are the same amount due on a pre-specified date every month, known as an amortized schedule.

• How to handle problems, such as late payments or default. Lenders usually provide a grace period after the due date (usually ten days) after which a fee is charged (usually $25) for late payment. Default means that the borrower has failed to satisfy and abide by the payment schedule laid out in the note (usually there additional conditions for default, spelled out in the note.)

Promissory notes also contain numerous other clauses which are less important but are still required to establish the various rights and obligations of each party.