When you get a loan or lend money to a third party, a promissory note is a document that is used to bind the borrower to the repayment terms issued by the lender. And although they are widely used, you may not know exactly what they are actually used for, because there are other types of paperwork involved in financial transactions like this which do not fall under the same definition.
To bring you up to speed, here is a look at when promissory notes are used and how to go about creating one of your own.
Although promissory notes are comparatively simple, they may be required as part of the loan process alongside a more in-depth loan agreement, and it is their relative simplicity that makes them convenient in terms of providing clarity about the terms and conditions of the loan itself.
You may be asked to sign one when you apply for a business loan, take out a finance package on a car, seek a mortgage with a mainstream lender, or commit to a student loan solution to cover the costs of your education.
You could also make use of a promissory note if you are offering a personal loan to friends and family, or seeking a loan in the same situation.
Promissory note template
The good news is that with the help of a promissory note template, it is incredibly straightforward to create your very own, legally binding and rigorously composed documents that will be useful in any of the scenarios covered above.
Perhaps most pertinently, if you run a business and you are going to be loaning money, or you are going to be giving a personal loan to someone you know, a promissory note can save a lot of pain and problems further down the line.
Although not as complex as loan agreements, promissory notes will still set out the specifics of the loan, including the personal details of the parties involved, how much money is changing hands, how much interest is being levied against the loan amount, and of course the repayment terms. This will further break down into the number of repayments expected, the frequency with which they will need to be supplied, the size of each repayment and also an outline of any collateral which is associated with the loan.
Points to note
Promissory notes are actually more flexible than you might imagine, and it is not just loan scenarios in which they can be useful.
For example, some businesses will give promissory notes to anyone who invests in them, with a view to providing them with a return on their initial investment that is set in stone and established over a set period.
Also be aware that you may still need to make use of a legal expert in the case that you decide to use a promissory note yourself, depending on the nature of the deal, to ensure that you are compliant with all relevant financial regulations.