What Is A Promissory Note? (2026)
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Reviewed By Adam Ramirez, J.D.
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Summary
- A promissory note is a contract between a lender and a borrower
- It specifies the amount borrowed, interest due and repayment terms
- It’s binding, so a lender can take legal action if a borrower doesn’t pay
Lending money to someone always comes with some level of risk. That’s why every loan, even quick loans made to friends or family members, should come with a promissory note.
But what is a promissory note exactly, and how does it protect you? Here’s a closer look.
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How Promissory Notes Work
A promissory note is effectively a formal version of an IOU. When a person or organization lends someone else money, they usually create a promissory note outlining the loan terms. Promissory notes are legally binding, so they allow a lender to take legal action if a borrower defaults.
What Is Included in a Promissory Note?
A promissory note should clearly outline the terms and details of the loan. Usually, it will include the following:
- Names and contact information of the lender and borrower
- The amount borrowed
- How interest accrues
- Repayment schedules
- Late fees
- Whether there’s a prepayment penalty
- Details of any collateral
- What happens if the borrower defaults
To be legally binding, the promissory note must have both parties’ signatures, too.
Types of Promissory Notes Explained
There are several types of promissory notes for different situations. These are a few examples:
- Secured Amortized Promissory Note: The borrower puts up an asset as collateral and then repays interest and principal in installments over time. You can create a secured amortized promissory note online.
- Unsecured Demand Promissory Note: The borrower agrees to repay the loan when the lender asks, and they don’t put up any collateral. You might create an unsecured demand promissory note for short-term loans to friends or family.
- Unsecured Amortized Promissory Note: The borrower agrees to repay interest and principal in installments, and they don’t put up collateral. You can generate an unsecured amortized promissory note in minutes.
- Secured Interest-Only Balloon Promissory Note: The borrower makes interest-only payments and then repays all the principal in a single “balloon” payment. This is common in business and real estate loans. Creating a secured interest-only balloon promissory note is quick and easy.
- Unsecured Lump-Sum Promissory Note: The borrower agrees to repay the whole loan (interest plus principal) by a specific date. You can create your unsecured lump-sum promissory note online.
In all of these situations, what is a promissory note for? Your promissory note helps protect you from financial losses, and the one you choose depends on the situation and your risk tolerance. For instance, because a secured loan involves a borrower putting up collateral, you’re exposed to less risk.
How Promissory Notes Are Repaid
There are a few different ways that promissory notes can be repaid. Amortized promissory notes are paid in installments that include both interest and principal. Demand and lump-sum promissory notes are paid in full at some point in the future.
When Do You Need a Promissory Note?
It’s a good idea to have a promissory note every time you lend someone money. Even if you’re making an informal loan to a friend or family member, using the right type of promissory note can help protect you from unintended consequences.
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