What Is a Promissory Note and Why Do You Need One?


A promissory note is a financial instrument containing a written pledge from one party (the issuer or maker of the note) to pay a definite amount of money to another party (the payee of the note), either on-demand or at a stated future date. 

Usually, all the terms referring to the sovereign debt are contained in a promissory note, such as the principal balance, interest rate, final payment, dates, and locations of the problem, and the lender’s handwriting.

Although they may be issued by financial institutions (see below), promissory notes are debt securities that enable firms and individuals to obtain funding from a source other than a bank. 

Promissory notes can, in effect, allow anybody to be a lender. For example, although it’s not a given, to take out a small personal loan, you might be required to sign a free promissory note template which can be accessed at CocoSign. 

Cocosign is an e-sign solution. It is widely used across the world to sign documents under a secured and protected environment. It also allows its customers to access a multitude of templates, promissory notes, lease agreements, contracts, and business agreements for free after signing up to the official site. 

Types of Promissory Notes

Notes are of various sorts, depending on the sort of promissory loan. Few are referred to below. 

Personal Promissory Notes-This is a personal loan obtained by friends or relatives promissory note shows confidence and trust in the interest of the creditor, even when obtaining a loan from close contact, people avoid legal writings.

Commercial- Here, the note is made when interacting with trade creditors like banks. Personal notes are similar to the majority of the commercial promissory contract.

Real Estate- In respect of inter repercussions, this is close to corporate notes. If the creditor is becoming a defaulter, then once the debt is resolved, the party has the right to hold the land. As all the critical information becomes available, it is a little dangerous, which may impede the credit history of the borrower in the future.

Investments- The promissory note is sometimes used to raise the company’s funds. As a protection purpose, it is used and covered by securities laws. It includes terms and conditions about returns on investment.

Depending on how the loan is to be repaid, promissory notes will also vary, so navigate to our CocoSign page to know more about it:

  • Lump-sum: The whole amount of the loan must be repaid in one installment.  
  • Due on Demand: When the lender demands repayment, the borrower must repay the loan. 
  • Installment: A defined payment plan defines how to pay back the loan. 
  • With (or without) interest: If any, the agreement should set out the interest rate.

Needs for Promissory Notes

Each state has its laws regarding the essential components of a promissory note, but similar components must usually be included: 

  1. The payor: This is the obligated person who agrees to repay the debt. 
  2. The payee: This is the lender, the individual or organization that lends the money. 
  3. Date: This is the date on which the guarantee of restitution takes effect. 
  4. The sum of principal: This determines the face value of the money lent by the payer. 
  5. The interest rate: Usually, the interest rate being paid is specified. It may be simple interest, compounded interest, or some other way for interest to be measured.
  6. The day the first payment is due: the first day of the month and the subsequent first day of the following months, before the loan is paid off, maybe an example of the first payment date. 
  7. The date on which the promissory note ends: the date could be the last installment of an amortized loan payable on a given date in a sequence of even and even installments, or it could be a balloon payment payable on a particular date to make the entire outstanding balance payable.

A prepayment penalty is not included in all promissory notes, but some lenders prefer to be guaranteed a certain rate of return, and if the payer pays off the promissory note before its maturity date, this may be lowered or withdrawn. The amount of six months’ unearned interest may be equal to a typical prepayment penalty. 

Promissory notes are binding documents, but there are repercussions for their terms not being followed. For example, if you fail to repay a loan that’s secured by the house, you might lose your home to foreclosure. The creditor will have the right to bring you to court, give the debt to a debt management company, or report to the credit agencies.


A bank can issue a promissory note, but anyone who lends money can also issue a person or a business or company. A promissory note is not a contract, but before you take out a mortgage, you will likely have to sign one.

For both individual and commercial loans, promissory notes may be used and are a convenient measure to decide how the payment is made, e.g. by a certain date, in installments, or on-demand. The conditions of the loan can be specified to suit your business requirements.

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