Difference Between a Promissory Note & a Loan Agreement

Borrowing money can become complicated if you don't understand the process. The difference between a promissory note and a loan agreement is small. A promissory note is usually a promise for a lump sum, while a loan agreement is paid back in instalment payments. Once you understand the difference, you can make the proper choice for your particular needs.


Both a promissory note and loan agreement have to do with borrowing money. Whether it is a specific amount or an open-ended line of credit the bottom line is the money must be paid back. Typically, a loan agreement includes much more detailed information not only about the borrowed amount, but also about the method and time frame that the money is to be paid back in.


Who signs on the line is another important difference between a promissory note and loan agreement. Both the lender and the borrower sign a loan agreement, acknowledging they both understand the specifics of the loan.

Only the borrower signs a promissory note, which is typically less detailed.


Both promissory notes and loan agreements are legally binding contracts. In each case, the lender holds the right to recover monetary damages in court if the borrower fails to meet the terms of the loan.


The decision to use a promissory note or go with a loan agreement is a personal one. Each instrument has its benefits and its issues. In general a straightforward loan or money or sale of a product that can be paid off with a future lump sum can be handled through a promissory note. A more complicated arrangement, where there is compounded interest involved and instalment payments due, will probably be better served through a standard loan agreement.

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About the Author

Candace Webb has been writing professionally since 1989. She has worked as a full-time journalist as well as contributed to metropolitan newspapers including the "Tennessean." She has also worked on staff as an associate editor at the "Nashville Parent" magazine. Webb holds a Bachelor of Arts in journalism with a minor in business from San Jose State University.

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