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What Is a Promissory Note?

A Promissory Note is also known as a loan agreement, IOU, personal note, or note payable.

It is a document that:

  • Describes a loan made from a lender to a borrower
  • Confirms the borrower's promise to pay back the sum of
    money, or principal, to the lender
  • Establishes a repayment plan for the amount borrowed
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When Should I Use a Promissory Note?

You can use a Promissory Note if you've borrowed money for:

  • College or post-secondary education
  • A large purchase, such as a car, furniture, or electronic equipment
  • Starting a small business
  • Personal expenses, such as a wedding or vacation

Should I Use a Promissory Note or a Loan Agreement?

Although both contracts are used for loans, they have a few differences.

A Promissory Note:

  • Is best for loans of smaller amounts
  • Has simpler repayment terms than a Loan Agreement
  • Typically only includes the borrower's signature, while a Loan Agreement includes the signature of both the borrower and the lender
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What Information Do I Include in a Promissory Note?

A Promissory Note should contain the following details:

  • Loan amount and interest, which is a lending fee calculated
    as a percentage of the principal (e.g. 5% interest on a $1000
    loan is $50)
  • Lender and borrower information
  • Term, or length, of the contract
  • Payment schedule (single payment or regular payments)
  • Options for penalties on late payments and for collateral

What Payment Options Are Available with a Promissory Note?

A loan can be repaid in a few different ways, including:

  • Single payment on a specific date: a one-time payment made
    at the end of the term
  • Single payment upon notice: a one-time payment due by a
    certain date upon receiving notice from the lender (also known
    as a demand loan)
  • Regular payments: payments of a specific amount made at
    regular intervals
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