A promissory note is a contract detailing the terms of a promise by one party (the maker ) to pay a sum of money to the other (the payee). The obligation may arise from the repayment of a loan or from another form of debt. For example, in the sale of a business, the purchase price might be a combination of an immediate cash payment and one or more promissory notes for the balance.
The terms of a note typically include the principal amount, the interest rate if any, and the maturity date. Sometimes there will be provisions concerning the payee's rights in the event of a default.
For loans between individuals, writing and signing a promissory note is often considered a good idea for tax and recordkeeping reasons.
A promissory note differs from a IOU in that the latter is a simple acknowledgement of the existence of a debt owed, whereas a promissory note, as its name implies, contains an affirmative undertaking to pay the amount stated.
In the United States, a promissory note that meets certain conditions is a negotiable instrument governed by Article 3 of the Uniform Commercial Code. Negotiable promissory notes are used extensively in combination with mortgages in the financing of real estate transactions. Other uses of promissory notes include the capitalization of corporate finances through the issuance and transfer of commercial paper.
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