Introduction to Promissory Notes

A promissory note might sound like a complicated financial term although it had some very humble beginnings. This article will help you understand what a promissory note is in layman terms that are easy to follow.

To begin with, let us look at a brief history of how the promissory note evolved. When trade was carried out in the early civilizations, it usually involved a barter system where people would exchange some product for another. People then began to use money to buy and sell products and if a person did not have any money to buy at a certain time, he would write a simple note that mentioned the amount of money that he owed to the other person. This is popularly known as the IOU. It was one of the earliest forms of promissory notes.

As finance and trade have evolved in much more sophisticated markets, the promissory note has also evolved. A simple IOU will merely state the amount of money to be paid back. It will also state who owes who.

A promissory note goes much further than that. It will list the following details.

• The parties involved
• The amount of principal that is owed
• The amount of interest, if any, that is to be paid. It will also lay out any clauses that might allow the interest rate to be changed in the future.
• The timeframe for the repayment. When the loan will have to be repaid and what kind of penalties or late fees will have to be paid in the event of default or late payments.
• The promissory note will also mention other details such as collateral used, if any.
• Lastly, the promissory note will also have to list the consequences of non repayment.

These promissory notes are known as accounts payable in accounting statements. As an individual, you might have signed many promissory notes in your life without ever realizing it. Any time you finance something, you would have probably signed on a piece of paper that was part of the financial paperwork. That would have essentially been a promissory note that would have listed all the details mentioned above.

You might have signed one when you bought your car through financing or paid for your college with a loan. When signing a promissory note, always make sure to read the fine print well to understand all the terms stated in the promissory note.

Thomas Ajava writes about commercial financing loan topics for CommercialFinancingLoan.com.