Promissory notes are different from contracts
Avoid the confusion: understand the difference
A contract requires that two parties agree to its terms. The parties must exchange “consideration” (something of value) that binds both to fulfill a duty. Example: I pay you the rent in exchange for you putting an apartment at my disposal to live. A contract must have a bilateral or mutual consideration. This means that both parties have to give each other something of value for a contract to be valid.
Promissory notes are a special type of legal document. They are created by law (for example, the Uniform Commercial Code). A note contains a promise to pay a fixed amount of money at a certain time. There is no mutual or bilateral exchange of “consideration”. Notes can work in conjunction with other documentation, such as mortgages and security agreements, that detail additional aspects of the underlying transaction. Example: When used in a real estate transaction, the promissory note covers the promise to pay the amount due, the interest, and the due date, while the deed of trust or mortgage describes the other responsibilities of the parties involved more precisely .
Two key legal terms used in the promissory note are “promisor” and “promise.” A promisor is a person who makes a promise to return money; the fiancé is the person to whom the promise is made. The fiancé is entitled to receive payment from the promisor.
Promissory notes are written that call the individual promising to pay the “maker or borrower,” and the person to whom payment is promised is called the “payee or holder or lender.”
Because of these multiple identity options, make sure you understand exactly who needs to do what when investing or transacting in a note situation.
Promissory Note Basics
Promissory notes are negotiable instruments like checks: a promise by one person (or company) to pay another. They are flexible on the size of the payments, the timing of the payments, the interest rate, and where each payment is due. This flexibility makes promissory notes one of the main financial tools for commercial transactions.
Another name for notes is “commercial paper” or simply “paper” because it is governed by the Uniform Commercial Code. Checks are the business paper most people are familiar with.
• It can be valid and enforceable, even if it is written on a cocktail napkin. It must be written; contracts can be verbal.
• You must promise to pay money, not services.
• It can be proof that there is a debt. If a person fails to pay the debt specified in a promissory note, no other proof of breach of contract is needed to enforce that debt.
• Will be enforced by a court according to its terms — courts (with some exceptions) will not interpret those terms
UNIFORM COMMERCIAL CODE – BY STATE
The laws of the Uniform Commercial Code are established by each state. Most Uniform Commercial Code transactions involve secured property (mortgages, deeds of trust, liens) financed by a bank or lender with title to the secured property held by the lender as collateral until the loan is repaid.
• Promissory notes are different from contracts
• Understand the key differences
• Match the correct legal document to the job in question