A promissory note has a few standard components. Every note has a principal amount of the obligation or amount of debt being secured. Sometimes this principal amount will have a predetermined interest rate applied to it, and that will be added to the payments the promisor must make. A note must also include the names of the parties signing the contract, the date, the terms of repaying the obligation and the maturity date (the date the final payment of principal and any remaining interest is due). Additional rights and obligations can be disclosed in a note regarding steps to be taken if a foreclosure or bankruptcy occurs.
Demand promissory notes are a unique type of note that don’t have an actual maturity date. These notes must be repaid to the lender when he asks for it, which may sometimes be with only a few days notice.
Promissory notes can be signed between individuals and must be kept for tax purposes each year. These contracts can qualify as negotiable instruments according the Uniform Commercial Code if they meet certain conditions. They are often used along with mortgages to finance real estate transactions.
Promissory notes are also used to finance businesses. The contracts, also known as commercial papers, are used to provide capital to businesses in need. Usually the promissory notes are used as a form of financing to the company’s creditors.
Originally, promissory notes were used as an alternative form of private currency. As business transactions became more complicated, the rules and regulations that apply to the notes have changed as well. Today, promissory notes are binding contracts between parties where interest rates may be applied and risk of bankruptcy exists.