Negotiable Instruments and Promissory Note Essentials

Omissions in Negotiable Instruments

If an incomplete instrument is a negotiable instrument, it may be enforced according to its incomplete terms or according to its completed terms. If the instrument was not a negotiable instrument but becomes one after completion, the instrument may be enforced according to its completed terms.

Understanding Promissory Notes

A promissory note is a written promise by one party (the maker) to pay money to another (the payee) or to the bearer. It is a two-party negotiable instrument, unlike a draft, which is a three-party instrument.

It typically includes the following components:

• The names of the lender and borrower
• The date of the loan
• The principal amount
• The date the loan will be repaid in full
• The frequency of loan payments
• The interest rate charged on the loan payments
• Any applicable security agreement

Common Types of Promissory Notes

Personal Promissory Note

This type is used to record a personal loan made between two parties. A personal promissory note shows good faith on behalf of the borrower and provides the lender with recourse should the borrower fail to pay back the loan.

Commercial Promissory Note

A commercial promissory note is typically required by commercial lenders. Commercial promissory notes are often stricter than personal notes. If the borrower defaults on the loan, the commercial lender is entitled to immediate payment of the full balance, not just the past due amount. In most cases, the lender on a commercial promissory note can place a lien on the borrower’s property until payment in full is received.

Real Estate Promissory Note

A real estate promissory note is similar to a commercial note, as it often stipulates that a lien can be placed on the borrower’s home or other property if they default. If the borrower does default on a real estate loan, the information can become public record.

Investment Promissory Note

An investment promissory note is often used in business transactions. Investment promissory notes are exchanged to raise capital for the business, and they often contain clauses that deal with returns on investments for specific periods of time.