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A Promissory Note, also sometimes called an IOU, is essentially a one-sided document by which a borrower of money (most often just called the "Borrower") agrees to pay a lender (the "Lender"). A Promissory Note is different than a loan agreement because it only binds one party - the Borrower - to actions (such as payment) or consequences (such as if the Borrower doesn't pay), but it doesn't bind the Lender to anything. In fact, Lenders don't even sign Promissory Notes - only Borrowers do.
Often, Promissory Notes are used in place of more formal loan agreements when the loan is being made informally between friends or family members. Promissory Notes can even sometimes be used between very small businesses. When more formal loans are made between bigger businesses or banks, for example, that is when loan agreements are used.
How to use this Document
This document can be used in any situation where an individual or business is borrowing money from another individual or business but is best used in situations where money is being loaned somewhat informally, between family or friends. This is because the Promissory Note is only signed by one party, the Borrower, and it does not bind both parties to an agreement.
In this document, the basic details of the loan will be entered, such as the amount and when the total amount is due. It also includes, of course, the identifying details of both parties: the name and address of the individual borrower and lender, or the business name and business address of a company borrower or lender.
This Promissory Note will also include a determination of the biggest issue with the loan - whether or not interest will be charged.
A Promissory Note is a short, succinct document for a loan. For a more detailed loan, an in-depth Loan Agreement can be used.
Promissory Notes are governed by Article III of the Uniform Commercial Code (the "UCC").
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