What’s a Promissory Note? These Are the Key Things to Understand

Have you ever wondered what makes a loan legally binding?

In the financial world, one of the most important tools when borrowing or loaning money is the promissory note. If you’re investing in a business, buying property, or even just loaning money to a loved one, it’s important to understand a few key things about promissory notes.

What’s a promissory note, you might be wondering? Well, read on to learn all about this useful document, including how it might impact your financial dealings.

What’s a Promissory Note?

Simply, a promissory note is a document used in financial transactions. It is a written guarantee for one party to pay another a set amount, either now or on a certain date in the future.

They are a legal document and shouldn’t be entered into lightly, as they are considered legally-binding contracts.

What Information is Contained in Promissory Notes?

While the exact details of each promissory note will differ, but generally will contain all of the relevant details to the financial transaction.

This will include the names of both parties or businesses, the amount of money borrowed or due to be paid back, and the interest rate (if any) of the loan.

The terms of the repayment may require a lump sum payment, over smaller repayments over a set amount of time (such as months or years).

It will also include the frequency of the repayments and any consequences for late payments. Each party will also sign and date the document, along with the third-party issuer.

When Are They Used?

A standard promissory note is likely to be used across a range of personal or business financial transactions. They are more commonly used than you might think!

Here are some of the most common reasons why you might need to sign a legal promissory note.

Mortgages

If you’ve ever bought a home and signed a mortgage, then you might be familiar with a promissory note. While a mortgage and a promissory note aren’t the same, they are often used together.

When signing a mortgage, the promissory note states your guarantee to repay.

Investment Funding

Promissory notes are often used for investments. Businesses can sell them to raise capital or they can be used as guarantees when financing new projects.

They are useful in the business world when you want your loan to be in the name of your company, rather than tied to you personally.

Personal Loans

It’s not uncommon to see a promissory note used in personal transactions. If you’ve loaned money to a family member or friend, this can be a good way to keep track of the transaction details.

Contact a Quest Specialist

What’s a promissory note? Hopefully, by now you have an answer to that question and a better understanding of what they’re used for.

Contact Quest for all of your IRA needs, including promissory notes. Our expert team is here to help turn your financial dreams into reality.

We look forward to hearing from you.