Promissory Note

What is a Promissory Note?

A promissory note is a financial instrument that contains a written promise by one party (the issuer or maker) to pay a specified sum of money to another party (the payee) either on demand or at a predetermined future date. This document is legally binding and outlines the terms of the debt, including the principal amount, interest rate (if any), maturity date, and the signatures of the involved parties.

Example of a Promissory Note

Suppose John borrows ₹10,000 from his friend Lisa. To formalize the loan, John writes a promissory note to Lisa stating that he promises to repay the ₹10,000 within one year, with an annual interest rate of 5%. The note will include details such as the date of issuance, the total amount borrowed, the interest rate, the repayment date, and both John’s and Lisa’s signatures.

Features of a Promissory Note

Principal Amount: The amount of money being borrowed or lent.
Date of Issuance: The date when the note is created.
Maturity Date: The date by which the note must be repaid.
Interest Rate: If applicable, the interest rate charged on the principal amount.
Parties Involved: The names and signatures of the issuer (borrower) and the payee (lender).
Payment Terms: Conditions under which the payment will be made, including installments or lump-sum payment.
Legally Binding: The note is a legally enforceable document.

Promissory Note Format

While the format of a promissory note can vary, a typical template includes the following sections:

Title: "Promissory Note"
Principal Amount: The amount of money being borrowed.
Date of Issuance: When the note is written.
Parties: Names and contact information of the issuer and payee.
Promise to Pay: Statement of the issuer’s commitment to repay the principal amount.
Interest Rate: The interest rate on the borrowed amount, if applicable.
Repayment Schedule: Details of how and when the repayment will be made.
Signatures: Signatures of both parties, and the date of signing.

Difference Between Promissory Note and Bill of Exchange

Nature:

Promissory Note: A written promise to pay a specific amount to a specific person.
Bill of Exchange: A written order from one person (drawer) to another (drawee) to pay a specified amount to a third party (payee).

Parties Involved:

Promissory Note: Involves two parties – the maker (issuer) and the payee (lender).
Bill of Exchange: Involves three parties – the drawer (issuer), the drawee (payer), and the payee (recipient).

Liability:

Promissory Note: The maker is primarily liable for the payment.
Bill of Exchange: The drawee is primarily liable once they accept the bill.

Usage:

Promissory Note:** Commonly used in personal loans or business financing arrangements.
Bill of Exchange: Frequently used in international trade and commercial transactions.