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

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

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