What Is a Promissory Note?

A Promissory Note is a financial instrument that contains a written promise by the issuer to pay the recipient a set amount of money, either on demand or at a definite future date. A promissory note contains in writing all of the provisions pertaining to the indebtedness, including the principal amount, the interest rate, the maturity date, and the issuer’s signature. In terms of its legal strength, a promissory note is generally stronger than an IOU but weaker than a formal loan agreement. Nonetheless, the stipulations in a promissory note are considered to be an unconditional promise.

What Is a Promissory Note in Finance?

Although promissory notes may be issued by financial institutions like banks, in general they are used so that an individual or company can get formal financing from a source other than a bank. For example, many young adults sign promissory notes with private lenders when taking out a student loan.

Promissory Note Example

In cases where a promissory note is unconditional and salable, it may be sold between entities as a financial instrument. In this event it is usually referred to as a negotiable instrument.

Promissory Note Definition FAQs

A promissory note is a financial instrument that contains a written promise by the issuer to pay the recipient a set amount of money, either on demand or at a definite future date.
Many young adults sign promissory notes with private lenders when taking out a student loan.
Promissory notes may be issued by financial institutions like banks. In general, they are used so that an individual or company can get formal financing from a source other than a bank.
A promissory note contains in writing all of the provisions pertaining to the indebtedness, including the principal amount, the interest rate, the maturity date, and the issuer’s signature.
In terms of its legal strength, a promissory note is generally stronger than an IOU but weaker than a formal loan agreement.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.