Promissory Note

A promissory note is the document in which a borrower promises in writing to pay back a loan. It names the borrower and the lender, and it sets out the principal amount, the interest rate or rate formula, how and when payments are due, the maturity date, any fees, and the remedies if the borrower defaults. The borrower's signature makes it evidence of the debt.

In the US, many notes are governed by Article 3 of the Uniform Commercial Code (UCC), the state-adopted set of rules for commercial transactions. Article 3 treats a note as a "negotiable instrument" if it is an unconditional promise to pay a fixed amount of money, on demand or at a set time, among other tests. A negotiable note can be transferred by endorsement, which makes loans easier to sell or pledge.

The note is not the whole loan file. A business loan may also have a loan agreement with covenants, a security agreement or mortgage that pledges collateral, and a personal guarantee from the owners. The note is the promise to pay; the rest protect it.

Why it matters for lenders

If a borrower defaults, the lender usually has to show it holds a valid, signed note to enforce the debt. US bank examiners' testing steps include confirming that each note is signed, looks genuine and is negotiable. A missing original or an unsigned page can delay collection and weaken the lender's case.

The note also defines how the loan behaves. The rate, the day-count method, the late charge and the default interest rate all come from its terms. If the servicing system is set up with different numbers, every bill is off, and the lender may be charging something the note does not allow.

Notes also matter when loans change hands. Selling a loan, or a share of it in a loan participation, means the buyer will check that the note and its endorsements are in order.

How it works in practice

A commercial real estate lender closes a $3 million loan. The closing team prepares the note, mortgage and guarantee from the approved terms. After signing, the original note goes to a secure vault or custodian, and a scanned copy is attached to the loan record.

During boarding, a servicing specialist compares the system setup against the note: amount, rate, payment date, maturity, late fee and default rate. Any mismatch is fixed before the first bill goes out.

Problems start when terms are retyped from a PDF into a spreadsheet. A typo in the rate or maturity date may go unnoticed for years. Building the loan record from the approved terms and checking it against the signed note avoids that drift.