Promissory Note

A promissory note refers to any document that contains a written promise from one party (note issuer) to another party (note receiver) to pay a specific amount of money. This payment can be made on-demand or after a predetermined date. A promissory note includes all the terms and conditions of such an agreement, including principal sum, as well as maturity date, interest rate, issuer’s signature, etc.

A promissory note is a legally enforceable document, using which an individual can recover his/her debts. One thing to remember here is that a promissory note does not signify any bank or currency note. Simply understanding promissory note meaning is not enough though, one should also assess its types. 

Types of Promissory Notes

Promissory Notes can be Divided into Four Types, Which Include – 

  1. Commercial Note 

This is a promissory note or legal document involving an individual and a commercial lending company, such as banks and non-banking financial institutions. For instance, if Mr X avails education loan from a bank, he would need to sign such a promissory note, indicating that he intends to repay the outstanding amount along with interest within a specified tenure. 

  1. Personal Note

When an individual seeks credit from friends or relatives, any legal document establishing the repayment of that loan is known as a personal promissory note. However, in most cases, people lending to close relatives or friends overlook such a legally binding document for the transaction.

  1. Investments

A business firm may use a promissory note to procure funds for its operations. Such a move is governed by standard securities laws. Also, this document includes terms and conditions related to the return of the said investment  

  1. Real Estate

In case of such a promissory note, failure to repay the promised sum within a stipulated time can lead to the note’s issuer losing possession of his/her immovable property. Alender, on the other hand, is free to recover this sum by selling or acquiring this property in question. 

Features of a Promissory Note

Promissory note format remains unchanged regardless of where or how such a document is issued. Here are some features of these notes.

  • Promissory Notes are Express Undertakings

This signifies that promissory notes are not just a simple acknowledgement of paying a certain sum within a specified time. Instead, it is an express undertaking, meaning that breaching the same could lead to legal consequences and other disciplinary actions. 

For example, if Mr A writes that he owes Mr B Rs.10000; it does not automatically become a promissory note. Such a document must be bound by law.

  • Always in Written Format

Promissory notes are written tenders. Therefore, it cannot exist as an oral agreement. This is one of the basic requirements for this document.

  • Must Mention Specific Monetary Amounts

Every promissory note should show a specific amount of money that the issuer must repay within the specified time. Once such a note is signed, none of the parties involved in the agreement can change, add or subtract from the sum mentioned. Moreover, the mentioned sum needs to be a particular figure and not an approximate value of the debt.

  • Only Legal Tender Allowed

Promissory notes can only promise repayment in the form of rupee or dollars or any other currency. It cannot, however, promise repayment in kind. Therefore, in case of a promissory note in India, the issuer needs to repay the sum in the nation’s legal tender, the Indian Rupee. 

Mandatory Inclusions of a Promissory Note

A Typical Promissory Note Format in India Includes the Following Information – 

  1. Names of all Parties Involved – Such a document must include the names of the payee, drawee, and holder.

  2. Address and Contact Details – Should include the residential address and phone number of all parties involved.

  3. Promissory Note Amount – It must show the sum that is outstanding and must be repaid as per the note.

  4. Repayment Date – This refers to the specified period within which the sum mentioned in the promissory note must be repaid to the lender.

  5. Repayment Terms – The documents should include detailed repayment process for the said sum. Additionally, it must also include penalties or repercussions for late or missed payments. 

  6. Collateral Agreement – A promissory note example where the borrower pledges collateral is a real estate note. In such a case, the lender can take possession of an immovable property belonging to the borrower in case the borrower fails to repay the debt within the predetermined period.

  7. Interest Rate – If the lender is charging interest on the borrowed amount, the exact rate at which interest is being levied on the sum must be mentioned in this document as well.

For further information regarding promissory notes, students should check out Vedantu’s official website or app. It is the ideal learning destination for class 11 and 12 commerce students.

FAQ (Frequently Asked Questions)

1. What is a Promissory Note?

A promissory note refers to any legal agreement between one party (the issuer) and another party (the lender) regarding monetary payment within a specified date or on-demand. A typical example of a promissory note is the legally binding document that a lender signs with the borrower when providing the line of credit. 

As per this document, a borrower must repay a predetermined sum within a stipulated period. Failure to do so can lead to legal repercussions, as well as hefty fines. All promissory notes should include the name of the parties involved in such an agreement, date of repayment and other terms and conditions related to it. 

What are the Different Types of Promissory Notes?

There are four significant types of promissory notes in India. A personal note is the kind of promissory note that an individual should seek when lending money to family members or close relatives. A commercial note is the type of promissory note that is signed between a borrower and a financial institution.

A real estate note is when a borrower uses an immovable asset as collateral for the credit. Investment note is used by firms and businesses when procuring funds for the enterprise. Standard securities laws apply to these repayment agreements.