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Reviewed by May 18, 2022| Updated on
A promissory note is a legal and a financial instrument that is written between three financing parties: the maker, the lender, and the payee/the borrower. This note contains terms of the issuance, details of the debt like the circumstances of the loan, who the bearer is and from whom, the maturity date, the amount payable with interest or not, and more. It is a written promise by the lender assuring the borrower that they can avail money from the lender as specified after agreement. The maker can be the lender too.
Promissory notes are a written promise made by the maker for individuals and companies to see sources of finance from other than just banks. The note attests the validity of the lender and promises the credit worthiness of the borrower, since a promissory note only promises the repayment of the loan or credit that has been lent. In India, a promissory note can be issued under Section 4 of the Negotiable Instruments Act, 1881, therefore making it a legal instrument and binding the parties by law, the source of funds being an unregulated method. Even so, promissory notes are classified into secured and unsecured notes. Secured notes function a lot like bank loans with the requirement of a collateral, whereas unsecured notes require only a healthy credit score. Promissory notes are also considered securities, and are thus traded on the money market in India by banks and traders. They lay alongside bills of exchange, IOUs etc. but in comparison, contain a promise and the steps to fulfil the promise.