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Promissory Note


A promissory note is a legal document that acts like an IOU but with more detail and stronger enforcement power. It's a written agreement between a borrower (maker) and a lender (payee) outlining the terms of a loan.

Here's what a promissory note typically includes:

  • The principal amount: The amount of money borrowed.

  • Interest rate (if applicable): The amount of interest charged on the loan.

  • Maturity date: The date by which the loan must be repaid in full.

  • Payment schedule: How often the borrower will make payments (e.g., monthly, quarterly).

  • Late fees (optional): The penalty for missing a payment.

  • Signatures: The borrower's signature signifies their promise to repay, and the lender's signature acknowledges their acceptance of the terms.

Promissory notes are used in various situations, including:

  • Personal loans between friends or family

  • Informal business loans

  • Financing a car purchase from a private seller

  • Student loans (called Master Promissory Notes)

Benefits of using a promissory note:

  • Clarity of terms:  A promissory note ensures both parties are clear on the loan details and reduces the risk of misunderstandings.

  • Enforcement:  If the borrower defaults on the loan, the lender can use the promissory note as evidence in court to recover the money.

Here are some additional things to keep in mind about promissory notes:

  • While promissory notes are relatively simple legal documents, it's always a good idea to consult with an attorney if significant sums of money are involved.

  • There may be specific legal requirements for promissory notes in your jurisdiction.

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