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What is a promissory note

The promissory note is a negotiable financial instrument which is used for payment or as a hedging instrument. It is the simplest and often the quickest form of loan. It clearly shows the obligations and so it is an ideal medium for business.

Therefore, the promissory note acts as a payment instrument. It is a situation where the debtor agrees to pay a determined amount due to the creditor or third party in precisely appointed time and place. Practically, the promissory note represents a financial instrument (or security) which is possible to handle just like money. It can be sold prior to maturity and thus you can get cash quickly or it can be kept and you can get the money the day designed on the promissory note. The debtor has no chance to influence the creditor, i.e. the owner of the promissory note. He only has an obligation to pay the amount stated in the promissory note to an owner of the promissory note by the specified deadline.

Advantages of promissory notes

The enforcing promissory notes are one of their main and undisputed advantages. The promissory note is a safe instrument for creditors, because when a dispute arises, it is enough to show an original promissory note and legitimize himself as its owner or the creditor. That in itself is enough to court or arbitration to prove a claim under an obligation to pay. At that point, the creditor has the right to enforce his promissory note even using an executor, so there is no obstacle for repayment of a promissory note and creditors can quickly enforce their legitimate means. For the debtor, the situation is much worse. If he does not want to pay the promissory note, he has to show and prove the causes why he does not want to do it.

Requirements of promissory note

Requirements of promissory note are mandatory information that must be shown on the promissory note to be regarded as financial instrument. It absolutely does not matter in the form or the facts of a promissory note. Often an example is given: even the promissory note written on a napkin is valid if it includes legal formalities and it implies commitment and corresponding asset.

The promissory note must include the following information:

  • an indication that this is a promissory note (literal indication in the text)
  • order to pay the amount of money (without other conditions)
  • name and address of the person who has to pay the promissory note
  • information about maturity
  • information about the place of payment
  • name of the creditor (which to be paid to)
  • date and place of issue of promissory note
  • signature of the issuer of the promissory note

Usually it is advisable to write the amount both by numbers and by words to avoid additional write-up of other numbers which could increase the promissory note without the debtor's knowledge.

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Financial advice

If we decide to take a loan we should follow some basic rules to avoid getting into unexpectable troubles. The main principles are summarized on this webpage.

What is promisory note
Financial advisor
Loans - the general terms