taking notes on a book about loans

What is a Promissory Note?

A promissory note is a legal document that outlines a financial promise or obligation between two parties. You might run into promissory notes or MPNs when getting loans or paying rent.

Loans and promissory notes have a few things in common. They both are legal documents, financial documents, and they both outline a promise or obligation between two parties. But there are some key differences to remember, especially if you are about to enter into a loan agreement or sign a promissory note. 

Promissory Note Definition

What is a promissory note? First of all, these notes can also be called a “note payable” or a “PN” for short. It is a legal document that outlines a financial promise. Usually, a document like this outlines a financial obligation like the promise to pay back a borrowed sum of money. You can remember the promissory note definition by thinking of it as a financial promise note. It’s a note that promises person A will pay back X amount of dollars on X date to person B. 

This note will then outline all the information pertaining to the debt obligation like the principal amount borrowed, the interest rate, any fees or charges, the date the amount was borrowed and the dates payments are due, and the names and signatures of both parties involved. 

Promissory Notes vs Loans

Though they are both legally binding financial obligations toward an incurred debt, there are some key differences. A loan can often come with a promissory note, especially if the loan is for a small short-term loan, or if the loan is from a nontraditional lender. But a promissory note doesn’t necessarily have to do with a traditional loan transaction. 

Promissory notes can also be used in other financial situations besides a loan, and they can be used between friends, family, or nonlending businesses that are willing to take the note. Having a legal document outlining this transaction and the future debt obligation is important, even if the loan is between family members or friends. 

Installment Payment Promissory Notes

Promissory notes can also be used in the instant of paying for something in installments rather than all at once. Though this is similar to an installment loan, this payment promise is toward a purchase you promise to complete in increments, rather than a borrowed sum of money. 

Due on a Specific Date (DOSD) 

This type of note is exactly as it sounds. It’s a legal document that outlines when a sum of money is due. This might be when a loan amount or loan repayment is due, but it could also outline when your rent is due. For instance, a landlord might give a tenant a promissory note if they are late making rent payments. This can sometimes allow tenants to work alongside their landlords when they aren’t able to pay their rent on the exact monthly due date, but can promise to make that payment in a week or two instead. 

Due on Demand (DOD) 

A DOD note is most often used between two parties that are more familiar with each other like friends or family members. Like its name, this type of note means that the outlined payment is due on demand, rather than on a specified date. This means that the lending party is able to request the payment at any time. They are usually set up to be a “pay when you can” type agreement to help out a close friend or relative. 

Promissory Note Sample

The useful thing about these legal slips is that they are able to be used by regular individuals as well as businesses and lenders. This means that the next time you want to let a friend or family member borrow money, you can make the transaction more official by using this promissory note sample or creating your own.

To create your own you just have to make sure it includes all the necessary details about the loan transaction:

  • Name and signature of the borrower
  • Name and signature of the lender 
  • The amount of money borrowed
  • If applicable, the interest rate
  • If applicable, any collateral or assets involved
  • When the payment(s) is due
  • How the payment(s) are to be received 
  • The terms for what happens if payment(s) are late or short 

For example, a promissory note between two people might look something like this: 

Promissory Note Template

There are many reasons why you might need your own promissory note one day. You might need to lend money to a relative in need of help, or who would rather borrow from a family member than a lender. Borrowing from family can also help the borrower avoid interest rates and fees while still repaying the lender. 

Whether you want to let someone borrow money from you or would like to borrow money from someone else, it’s always a good idea to set up an official repayment plan. That way both parties involved will have a clear understanding of the borrowing agreement and terms. 

If you find yourself in need of a promissory note template, you can use the one below to help make all your personal borrowing transactions more official: 

Download a Promissory Note Template.

Master Promissory Note (MPN) 

A Master Promissory Note (MPN) is a type of promissory note used with student loan repayments. It is a legally binding contract between a student and their student loan lender, or the US Department of Education. This note outlines all the details of the student loan just like a regular PN would do.  

There are two types of MPNs you are required to sign when borrowing for school expenses. If you are an undergraduate student you will be required to fill out an MPN for Subsidized/Unsubsidized loans. If you are a graduate student you will be required to fill out a PLUS MPN or MPN for Subsidized/Unsubsidized loans that are specifically for graduate students. 

Keep in mind that by signing an MPN you are promising to repay your debt no matter what, even if you don’t finish school or have to declare bankruptcy. 

In Conclusion, 

It’s always a good idea to not only read the full terms and conditions of anything you sign, but also use official documents in all your transactions, whenever you can. This will help your personal business transactions be more official and protect you in case any parties involved break the terms of the contract.