The Home Category The Home: family money matters

DIY promissory note

A promissory note is exactly what its name suggests. At its most basic, it is a form of contract by which one party promises to repay another for a loan or debt.

Legal language is usually inserted to describe the method and schedule for repayment, and to address a variety of contingencies. While promissory notes were traditionally drafted by solicitors, it's quite possible today to write your own, either from scratch or using a commercial template.

What to include

There are three basic elements to a promissory note that must be identified first in the document.

The promisor is the person executing the document and promising to pay back a debt.

The promisee is the person for whose benefit the promise is made. The third element to be indentified is called the consideration. For a contract to be valid, there must be mutual consideration. In terms of a promissory note, the promisee provides consideration to the promisor in the form of a loan of some sort, and the promisor reciprocates by executing the note.

Terms of repayment

The terms of repayment often constitute the major content of the promissory note. Repayment can be made in periodic instalments, in a final lump sum or in a balloon that consists of regular small interest payments and a final lump-sum payment of the principal. The statement of terms can also describe additional fees for late payments as well as a payable-on-demand clause that allows the promisee to demand payment at any time. The terms should also describe how or where payment should be made, such as by cheque payable to a certain party and delivered to a certain place.

Other clauses

Several other clauses can be added to a promissory note to make it more effective. These include language that describes whether early payment is allowed, and how the parties will proceed in the event the promisor defaults on his obligation.

An acceleration clause allows the promisee to demand full payment if a regularly scheduled payment is missed.

One of the most important additional aspects of a promissory note is whether the promisee accepts collateral on the debt in addition to the note. By identifying as collateral an actual piece of property, such as a car or a piece of equipment, the promisee can file a lien against the collateral in the event the promisor goes bankrupt.