Promissory notes are different from contracts

Avoid confusion – understand the difference

Contracts

A contract requires that two parties agree to its terms. The parties must exchange “consideration” (something of value) that forces them both to fulfill a duty. Example: I pay you rent in exchange for you to give me an apartment to live in. A contract must have bilateral or mutual consideration. This means that both parties must give each other something of value for a contract to be valid.

Promissory notes

Promissory notes are a special type of legal document. They are created by law (for example, the Uniform Commercial Code). A note contains the promise to pay a fixed amount of money at a certain time. There is no mutual or bilateral exchange of “consideration”. The notes can work in conjunction with other documentation, such as mortgages and collateral agreements, that detail additional aspects of the underlying transaction. Example: When used in a real estate transaction, the promissory note covers the promise to pay the amount owed, interest, and due date, while the deed of trust or mortgage more precisely describes the other responsibilities of the parties involved. .

Key terms

Two key legal terms used in the promissory note are “promissory” and “promised.” A promisor is a person who promises to return the money; the fiancé is the person to whom the promise is made. The fiancee is entitled to receive payment of the promissory note.

Some notes are drawn up saying that the individual who promises to pay is the “grantor or the borrower”, and the person to whom the payment is promised is called the “payee or the holder or the lender.”

Because of these multiple identity options, make sure you understand exactly who should do what when investing or transacting in a promissory note situation.

Promissory note basics

Promissory notes are negotiable instruments like checks – a promise by one person (or business) to pay another. They are flexible in terms of the amount of payments, the timing of the payments, the interest rate, and where each payment will be made. This flexibility makes promissory notes one of the main financial tools for business transactions.

Another name for promissory notes is “commercial paper” or simply “paper”, because it is governed by the Uniform Commercial Code. Checks are the business paper that most people are familiar with.

Key features

• It can be valid and enforceable, even if it is written on a cocktail napkin. It must be written; contracts can be verbal.

• You must promise to pay money, not services.

• It can be proof that there is a debt. If a person fails to pay the debt specified in a promissory note, no other evidence of breach of contract is needed to enforce that debt.

• Will be enforced by a court according to its terms — the courts (with some exceptions) will not interpret those terms

UNIFORM COMMERCIAL CODE – BY STATE

Each state establishes the laws of the Uniform Commercial Code. Most Uniform Commercial Code transactions involve secured property (mortgages, deeds of trust, bonds) financed by a bank or lender with title to the secured property held by the lender as collateral until the loan is repaid.

Conclusions

• Promissory notes are different from contracts.

• Understand the key differences

• Match the correct legal document to the job at hand