how promissory notes work
promissory notes can lie between an iou s informality and a loan contract s rigidity an iou merely acknowledges a debt and the amount one party owes another a promissory note includes a promise to pay on demand or at a specified future date in addition to steps required for repayment like the repayment schedule although financial institutions may issue promissory notes for instance you might be required to sign one to take out a small personal loan they also allow companies and individuals to get financing from a non bank source this source can be an individual or a company willing to carry the note and provide the financing under the agreed upon terms in effect promissory notes can enable anyone to be a lender in its simplest form a promissory note might be a written promise to repay a family member state or federal securities entities may regulate more complicated promissory notes typically there are two parties to a promissory note the promisor also called the note s maker or issuer promises to repay the amount borrowed the promisee or payee is the person who gave the loan a promissory note can be secured or unsecured a secured promissory note describes the collateral typically property that secures the debt or amount borrowed for example if the borrower owns property the lender can use the car as collateral until the debt is repaid if the borrower doesn t repay the loan the promissory note permits the lender to take possession of the property 1an unsecured promissory note doesn t involve collateral in this case if the borrower doesn t repay the loan the lender can try to use standard debt collection procedures in either case the lender holds the promissory note until the debt is repaid typically those drafting a promissory note will consult with an attorney to make sure the note follows any state or federal laws around loans or investments 2a promissory note is usually held by the party that s owed money once the debt has been fully paid the note must be canceled by the payee and returned to the issuer 