Steps to Preparing a Promissory Note

Promissory notes relate to a promise in documentation to pay back debt or loan following specific terms, and a probable deadline. This can be done either in a single payment by request, or a few payments over time. This written promise will portray the parties involved in the loan or debt, as well as the amount of the debt, an outline of the debt paying agreement by debtor and the lender, and the specifics of the payments in order to repay the amount.

In regards to a promissory note, the person listed as the promisor would be the debtor. The promisee, is the lender, who has been promised to be repaid for their loan. In other context, they can be referred to as the obligor and the obligee, or maker and payee, respectively. The person in responsibility of owning the promissory note in a transfer or sale, is known as the holder.

The way a promissory note is established is that, first, a promise is made by one party to pay a sum of money to another party. That person writes into documentation his or her promise outlining all the details of the debt. They will state that the debt pertains to, the amount of the debt, how it will be paid off, and sometimes even a time-line or general time frame.

After this is done the person who the debt will be paid to may review it, and then they both will sign it putting it into effect. Usually these notes are transferred by the lender to a holder. The sale of this promissory note in a transfer is referred to as an endorsement. The endorsement notifies that the note must now be paid to the new owner of it, rather than the old owner.

It's similar to a change in ownership notice, just pertaining to a promissory note. If the person who promises decides to sell the property, etc.. that's being held as security for that note, they are not dissolved of their mandate to pay that note. They will still owe the remaining amount of that note, even if in full. Also, in regards to the "due date," if the person repaying the note wants to pay the note early, prior to that date, it must be arranged with the payee within the note, otherwise it cannot be done.

It is not uncommon for such a provision to be written into a note, along with some sort of penalization for the promisee for their early payoff, which can be established as an added amount in some cases. In various states, usury statutes exist that limit the rate of interest that can be charged on a loan. As a lender, one must be careful when establishing interest rates on promissory notes to prevent breaching these statutes.

If a lender is found to be in violation of one of these statutes, clearly breaking usury laws, they are subject to penalization. The penalty can be applied to the amount owed, usually a substantial amount in the form of giving back the interest. In the more serious cases, the lender may be asked to forfeit the entire amount owed of the promissory note.

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