Last updated March 12, 2024
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What is a Promissory Note?
A Promissory Note documents a borrower’s legally binding promise to pay back a specific sum of money to a person or company.
The Promissory Note will spell out the debt repayment's terms and conditions, such as:
- Loan amount
- When and how the loan will be repaid
- Collateral
- Interest on late payments.
What’s the difference between Secured and Unsecured Promissory Notes?
An Unsecured Promissory Note is one in which the borrower provides only a written promise to repay a loan.
A Promissory Note becomes secured when the borrower provides collateral in exchange for the loan. The lender can then sell the collateral to recoup the borrowed money if the borrower fails to repay the loan.
However, some types of collateral (e.g., intellectual property rights) require registration under the Companies Act by companies in Singapore. Failing to register this collateral within 30 days of creating the agreement will make gaining possession of the collateral unenforceable. Check Section 131(3) of the Companies Act to see if you need to register the collateral in your Promissory Note.
Both secured and unsecured Promissory Notes are legally binding.
Why should I use a Promissory Note?
Writing a Promissory Note is valuable because it's a legally binding and enforceable agreement between a borrower and a lender. Having a written agreement can reduce the risk of any confusion regarding the loan in the future, and it keeps both parties honest.
For example, with a Promissory Note, the lender can't claim that the sum of money was greater than it actually is. The borrower also can't deny that there ever was a loan. If a dispute goes to court, the note is evidence of an agreement.
What makes a Promissory Note invalid?
There are a few ways a Promissory Note becomes invalid:
- Amendments: Both parties must sign off on any changes to the original agreement.
- Losing the original version: Even if amendments are made to the agreement, the lender should keep a copy of the original version to help prove the new agreement’s legitimacy.
- Missing key details: A Promissory Note must include the payment amount and schedules, interest rates, and both parties' signatures.
- Unclear terms: A court needs to be able to interpret the agreement to enforce it. LawDepot’s template can help you clearly outline your agreement’s terms.
How do I create a Promissory Note?
You can easily create a Promissory Note by filling out LawDepot's questionnaire. Using our template will ensure you complete the necessary steps:
1. Provide each party’s details
Start your Promissory Note by providing the lender's and the borrower's full names and addresses. Also, specify whether each party is an individual or a company.
2. Outline the Promissory Note’s terms
Provide information regarding the following terms in your Promissory Note:
- Loan amount: The amount of money the borrower is receiving from the lender.
- Interest rate: If the lender is charging interest, state the percentage of interest and how often it will be compounded (i.e., monthly, annually, or every six months).
- Loan date: The date the borrower will receive the loan from the lender.
- Repayment: The method the borrower will use to repay the loan (i.e., a single payment versus regular payments). If it's in regular payments, specify if all the payments will be equal, the frequency, the first and last payment dates, and whether the payments will go towards both the interest and original loan amount.
3. State if the Promissory Note includes collateral
A borrower can offer a lender collateral (i.e., assets or property) as security for a loan. If the borrower doesn't uphold their end of the agreement, the lender takes permanent possession of the collateral as compensation for the loan.
If your Promissory Note includes collateral, describe the property the borrower is using as collateral. Also, state if the lender will retain ownership of the property until the borrower makes the final payment.
4. State late payment penalties
State if the lender will charge an interest rate as a late penalty.
If there's already an interest rate on the loan amount, specify the new interest rate after the increase.
Our template allows you to include up to eight additional clauses that our questionnaire might not have covered. The clauses will appear precisely as you write them, so we recommend writing in plain language to help reduce the risk of confusion. A Promissory Note is only valid if the terms can be interpreted.
6. Sign the document
Both parties need to sign the Promissory Note for it to be enforceable. The document will have two blank spaces at the bottom for signatures once the questionnaire is completed.
A space for a witness's signature can also be provided. Witnesses aren’t required to make the note legally binding, but they can help strengthen the evidence of a binding agreement in the event of a dispute.
Is a Promissory Note a negotiable instrument?
Yes, a Promissory Note is a negotiable instrument.
A negotiable instrument is a document that promises a payment of money to another party.
What is a Promissory Note in real estate?
In real estate, a Promissory Note is a document that contains the details of a mortgage loan. It ensures a borrower will repay their mortgage loan by a specific date.
In this context, Promissory Notes are usually called mortgage notes or mortgage Promissory Notes.
