A Promissory Note is a written, unconditional promise by one party (the maker or borrower) to pay a definite sum of money to another party (the payee or lender) either on demand or at a specified future date. Under the Uniform Commercial Code (UCC) Article 3, a properly drafted promissory note qualifies as a negotiable instrument, meaning the payee can endorse and transfer the note to third parties, who then acquire the right to collect on it, much the same way banks bundle mortgage notes into securities.

The enforceability of promissory notes is well established in American commercial law, with UCC Section 3-104 defining the essential requirements: the note must be in writing, signed by the maker, contain an unconditional promise to pay a fixed amount, be payable on demand or at a definite time, and be payable to order or to bearer. Meeting these requirements elevates the document from a simple IOU to a negotiable instrument with enhanced legal protections for the holder.

Promissory notes are classified as either secured or unsecured. A secured note is backed by collateral pledged under a separate security agreement governed by UCC Article 9, giving the lender the right to seize and sell the collateral upon default. An unsecured note relies solely on the borrower's personal promise to repay, making it riskier for the lender but simpler to execute. Unlike a comprehensive loan agreement, which is a bilateral contract with covenants, representations, and conditions, a promissory note is the maker's unilateral promise to pay, though the two documents are frequently used together in larger transactions.

Personal loans between family members and friends are the most common use case. Without a written promissory note, courts may presume that a money transfer was a gift rather than a loan, leaving the lender with no legal basis for repayment. The IRS also requires that loans between related parties charge at least the Applicable Federal Rate (AFR) under IRC Section 7872, and a promissory note documenting the interest rate prevents the IRS from imputing taxable interest income to the lender.

Business financing transactions rely heavily on promissory notes. Angel investors funding startups, businesses extending credit to customers, employers providing employee advances, and shareholders lending money to their corporations all use promissory notes to formalize the debt obligation and establish enforceable repayment terms.

Seller-financed real estate transactions, where the property seller acts as the lender, are structured around promissory notes secured by a deed of trust or mortgage. Down payment loans between family members helping first-time homebuyers similarly require promissory notes for both legal enforceability and mortgage lender compliance. Private student loans, equipment financing arrangements, and short-term bridge loans between businesses all depend on properly drafted promissory notes to establish clear payment obligations and default remedies.

The principal amount must be stated in both numerical and written form to prevent ambiguity. The interest rate must comply with state usury laws, which vary significantly: California caps personal loan interest at 10% per annum (Cal. Const. Art. XV, Section 1), while New York's civil usury limit is 16% (NY Gen. Oblig. Law 5-501) and criminal usury applies above 25%. Charging interest above the state usury ceiling can void the note entirely and expose the lender to statutory penalties.

The repayment schedule defines whether the note is payable in a lump sum at maturity, in equal monthly installments (amortized), as interest-only payments with a balloon payment at maturity, or on demand. The maturity date establishes when the full remaining balance becomes due regardless of the installment schedule.

Late payment provisions specify penalty amounts or percentages for overdue installments, typically structured as a percentage of the missed payment (commonly 5%) or a flat fee assessed after a grace period. The acceleration clause permits the lender to demand immediate payment of the entire outstanding balance upon borrower default, rather than suing for each missed payment individually.

For secured notes, the collateral must be described with specificity, including serial numbers, VINs, property addresses, or account numbers as applicable. Prepayment terms should state whether early repayment is permitted without penalty. A governing law clause, default remedies, waiver of presentment and demand (standard UCC language), and the maker's signature complete the essential elements.