A promissory note is a written promise to repay some type of debt or loan. The note typically spells out specific terms related to the obligation, including either the date of repayment or the arrangements for a series of payments to pay off the financial obligation.
A promissory note clearly identifies the parties involved in the transaction. Certain language is used when drafting a promissory note. All involved parties should clearly understand this terminology. The following terms and phrases are commonly used in a promissory note:
- Promisor: A promisor is the person making the promise. This would be the party promising to repay a financial obligation from the promisee or other parties involved in the transaction. The promisor may also be referred to as the Obligor.
- Promisee: A promisee is the individual(s) receiving payment for the financial contribution they made to the promisor. The promisee may also be referred to as the Obligee.
- Consideration: A consideration refers to the value each party receives in exchange for entering into the promissory note. The consideration involved with a promissory note would be the loan that the promisor receives and the repayment received by the promisee.
- Security for the Loan: Security for a Loan is some form of asset to guarantee the promisee that a major portion of the loan can be recovered if the promisor defaults. Generally, security of the loan is only recommended for large sums of money. Security for a promissory note may include a deed to a property or a title to a car or other substantial personal asset. If the promisor is unable to pay their debts and files for bankruptcy, the debt obligation of the promissory note is only repaid, after all, secured creditors have been paid. Since a promissory note is considered an unsecured obligation, the promisee may not receive any repayment at all or only partial repayment.
- Usury: Usury is an interest rate on the loan that is deemed too high to be legally fair. What is considered an unlawfully high interest rate varies by state. In some cases, the state may apply the interest payment on the loan towards paying off the loan, effectively taking the interest rate down to zero. In many states, an interest rate substantially out of proportion with the amount of the original loan is considered a criminal offense. Note: The promisee shouldn't automatically base their interest rate on what a local bank would change to borrow the same amount since regulations are different for individuals making a loan to another party.
- Late Fee: A late fee is a specific amount of money added to the original debt if the promisor extends beyond the agreed upon payment date. The amount of the late fee is predetermined within the text of the promissory note. Some states have restrictions on the amount that can be assessed for a late payment.