Promissory Note

What Is a Promissory Note?

A promissory note is a written promise to repay money. The person who signs it, called the maker, agrees to pay a set amount to the person named in the note, called the payee. The note usually states the principal amount, the interest rate, the schedule for repayment, and the date or conditions under which the debt must be fully paid. Because it is a written instrument, it gives both sides a clear record of what was agreed.

How It Works

A promissory note is a form of debt that is documented in writing. Unlike a casual loan between friends, a formal note typically includes signatures, a date, and terms that can be enforced if the borrower fails to pay. Some notes are repaid in a single lump sum at maturity, while others call for regular installments that combine interest and principal, similar to an amortizing loan. Notes may be secured by collateral, such as real estate or equipment, which gives the lender a claim on specific assets if the borrower defaults. Unsecured notes rely only on the borrower's promise.

Promissory notes are used in many settings, including mortgages, business financing, student loans, and private lending between individuals. A mortgage, for example, is typically backed by a promissory note that sets out the borrower's repayment obligation, while a separate security instrument ties the property to the debt.

Why It Matters to Investors

For investors, promissory notes can represent a form of fixed income or private credit. Some companies issue notes to raise money directly from investors, and some investors buy existing notes from original lenders. Notes are generally less liquid than publicly traded bonds, so they can be harder to sell before maturity. Their value also depends heavily on the borrower's ability to repay, which makes credit risk an important consideration. Reading the note carefully, including any default terms, prepayment rights, and collateral provisions, helps clarify what the holder is actually entitled to receive.