A promissory note is an agreement in writing that one person (or entity) will pay another person (or entity) according to agreement terms. The terms may include the rate of interest, the date it will mature, and the amount of the note.
Is a Promissory Note Enforceable?
Although a Promissory Note is a written document, and the lender expects to repayment, that is not always enforceable. Usually, there is no mention of the repercussions for defaulting on a promissory note.
What Are Some Examples of Promissory Notes?
Student loans are actually promissory notes. Sometimes, a student will sign a note for each amount they borrow. Or, they may sign just one “master” note.
A Promissory Note is part of a mortgage agreement. It can actually serve as a loan document for people who want to buy a home, but don’t qualify for a traditional mortgage.
Corporations will use Promissory Notes to gain a short term loan. They usually will take a loan against their accounts receivables. That is, the lender loans them the money temporarily while they wait for customers to pay.
What Should I Watch Out For?
When you invest in Promissory Notes, there is a chance that the borrower may default on them. Skipping banks and traditional lenders means giving up the protection they offer.
Companies that borrow against their accounts receivables might not get paid. If you’ve purchased a struggling company’s notes, you’ll be out of luck.
Promissory Notes are, for the most part, offered only to experienced investors that can handle risk.