PROMISSORY NOTE

PROMISSORY NOTE:

A promissory note is a financial instrument that contains a written promise by one party (the note's issuer or maker) to pay another party (the note's payee) a definite sum of money, either on demand or at a specified future date. A promissory note typically contains all the terms pertaining to the indebtedness, such as the principal amount, interest rate, maturity date, date and place of issuance, and issuer's signature.

Although financial institutions may issue them  promissory notes are debt instruments that allow companies and individuals to get financing from a source other than a bank. This source can be an individual or a company willing to carry the note (and provide the financing) under the agreed-upon terms. In effect, anyone becomes a lender when he issues a promissory note.

A promissory note has the following character:

1.It must be in writing.

2.It must contain a clear promise to pay. Mere acknowledgement of a debt is not a promissory note.

3.The promise to pay must be unconditional ''I promise to pay Rs 500 as soon as I can'' is not an unconditional promise.

4.The promisser or maker must sign the promissory note.

5.The maker must be a certain person.

6.It should not be made payable to the bearer.

7.It should be properly stamped.

ADVANTAGES OF PROMISSORY NOTE:

A promissory note is sometimes referred to as an "IOU." but it is a legal form just like a loan. You can use it for obligations ranging from inter-family loans to mortgages. Student loans, bank loans, commercial loans and vehicle loans are other common uses.

The simplicity and straightforward nature of a promissory note make it most beneficial when a loan has simple payment terms. You don't need to record nearly as much detail or have as lengthy of a document with a promissory note. Minimal elements to includeare the loan amount, interest rate and repayment schedule, according to Equifax. It's helpful to add a few additional details, such as the property address and phone numbers of the parties involved. With basic inter-family loans and other small-value notes, you don't need a thorough legal review of the document. Instead, have a CPA, financial professional or Notary "witness" the signing of the note.

DISADVANTAGE OF PROMISSORY NOTE:

Since the primary value of a promissory note is simplifying the loan process, it isn't as beneficial for more complex situations. A loan agreement is necessary when you have a more complicated loan or you want greater protection against borrower default.

Another risk to novice borrowers is that savvy lenders may hide unfavorable terms in the fine print of a longer promissory note. Before signing any type of legally-binding loan document, both parties need to thoroughly read and understand all critical terms of the document. With a real estate note, one tactic used by lenders is tucking early payment penalty details into obscure sections of the note. This penalty means the borrower may have to pay a lump sum penalty when trying to pay off the loan before the mortgage term is completed. Time-consuming legal reviews sometimes are necessary with more detailed notes.