Promissory note is a promise made in writing to pay a specified sum of money, on demand or at a given date, to a designated person. In most cases, it is a promise to repay money that has been lent for business purposes. The sum that is to be repaid is usually more than the sum lent. The difference is the interest on the loan. The person who signs the note is called the maker. The person to whom it is made payable is called the payee. The date on which payment is due is the redemption date.
A note containing the words “order of” before the name of the payee is negotiable and may be assigned, or passed, to a third party, who is known as the holder. To complete the assignment, the payee must endorse the note by signing his or her name on the back of the note and then, ideally, informing the maker in writing. The holder may, in turn, transfer the note to another person by endorsing it. This can go on until the redemption date is reached, at which time the note is deemed to have matured. These transfers take place because promissory notes are bought and sold.
Many promissory notes are backed by collateral (some form of property offered as security or a guarantee of repayment of the loan). The collateral is held by the payee and returned when the note has been paid. If the maker fails to pay, the payee may sell the collateral, taking the costs of the sale and the sum due on the note before handing the balance, if any, to the maker.
Promissory notes were common at the time of the Renaissance. Today, they are relatively rare chiefly because credit terms are generally offered in commercial contracts for buying and selling goods.
