Understanding Promissory Note

A promissory note is a form of negotiable instrument which is differentiated from drafts in its elements and function. The two primary forms of negotiable instrument are drafts and notes, with the difference being that promissory notes are promises, not orders like drafts. An order, by definition, involves three parties, while a promissory note need only involve two parties, the maker and the payee. A promissory note also serves a very different function from drafts, as promissory notes are focused on obligations and debts, instead of simply on payments.

When an individual takes out a loan, be it from a bank or another individual, promissory notes are a common way of representing that loan in official terms, such that the person taking out the loan will promise to repay the loan with whatever interest is agreed upon. This is because promissory notes are used to indicate a promise of later payment in no uncertain terms. Promissory notes do not simply indicate an obligation or a debt; they contain the clear and specific terms of monetary payment for a given debt.

Promissory notes are most often used in either business practices, as a means for a given company to obtain capital, or in real estate transactions, as a way for home purchasers to finance the transaction. The promissory note in the latter situation would likely include the amount of the loan offered for the sake of purchasing the house, along with the interest rate for that loan and the date when it might mature.

Government restriction on promissory notes is actually somewhat more stringent than one would expect, as promissory notes could actually serve the function of a rudimentary form of private currency. In their original forms, this was exactly what promissory notes did: allowing individuals to make transactions with each other without needing to resort to any form of official Government currency.

Technically, the paper money that is used all throughout modern financial transactions is actually a form of promissory note, as it is a guarantee that a Government-sanctioned bank will pay the bearer of the promissory note some amount of money on demand. This was especially true of banknotes in the time when they could be exchanged for actual gold, as they were very much promissory notes, indicating a debt of gold.

In the modern world, this is no longer the case, but banknotes and paper currency remain a form of promissory note, evidenced by nothing so much as the fact that so many transactions occur without any kind of exchange of paper money. A banknote in the modern world is, frome one point of view, a promissory note that the bank will provide the holder with a certain amount of money recorded in a bank account which the holder can then use for other transactions.

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