A written and signed commitment to pay back money in exchange for a loan or other funding is known as a promissory note. The principle debt amount, interest rate, maturity date, payment schedule, date and location of issuance, and the issuer’s signature are all commonly included in a promissory note.

Section 4 of the Act defines, “A promissory note is an instrument in writing (note being a bank-note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the order of a certain person, or to the bearer of the instruments.”

What to include in a promissory note

The promissory note form should include

• Name and address of borrower and lender
• Maturity date
• Sum borrowed
• Payment schedule
• Interest rate and how interest is calculated
• Prepayments process
• Overdue payment interest charged
• Default
• Waivers, amendments, and governing law for the promissory note

Parties of Promissory Note

All promissory notes constitute three primary parties. These include the drawee, drawer and payee.

• Drawer: A drawer is a person who agrees to pay the drawee a certain amount of money on the maturity of the promissory note. He/she is also known as maker.
• Drawee: She/He is an individual, in whose favour the note is prepared. In usual cases the drawee is also the payee until and unless the promissory note is transferred specifically in favour of the payee. For e.g. Ram is considered a drawer if he promises to pay Shyam Rs.5000 (Shyam is the drawee). However, if the same promissory note is transferred in favour of Rohan, then Rohan becomes the payee.
• Payee: A payee is someone to whom the payment is made.

Most of the times, the payee and drawee are the same people to whom the cash is paid. The party who has loaned the money keeps the promissory note, and when the due is cleared, the payee or drawee cancels the note and gives it to the drawer/payee.

Features of Promissory Note

• Printed/Written Agreement – A promissory should be in writing, and an oral promise to pay money is not accepted.
• Pay Defined Amount – It is a promise to pay the money on a particular time or when demanded. The mentioned amount can neither be added or subtracted.
• Signed Documents – The document is duly signed and drawn by the drawer and stamped.
• Unconditional Promise – The promise to pay a certain amount of money must be absolute in all cases. In such notes, a conditional guarantee is not accepted.
• Legal Composition – All the payment should be made in the nation’s legal currency.
• Detailed Information – The note has all the required information including the name of the drawer and payee, date of maturity, terms of repayment, issue date, name of the drawee, name, and signature of the drawer, principal amount, and the rate of interest, etc.

Types of Promissory Notes

Depending upon the kind of promissory loan, notes are of different types. Few are mentioned below.

• Personal Promissory Notes – This is a particular loan taken from family or friends. Though people avoid legal writings when seeking a loan from close contact, the promissory note shows belief and trust in the interest of the borrower.
• Commercial – Here, the note is made when dealing with commercial lenders such as banks. Most of the commercial promissory agreement is similar to personal notes.
• Real Estate – This is similar to commercial notes in terms of nonpayment consequences. If the borrower becomes a defaulter, then the party has the right to keep the property until the debt is cleared. It is a little risky as all the essential details become public, which can hinder the borrower’s credit history in the future.
• Investments – The promissory note is occasionally used to raise funds for the business. It is used as a security purpose and managed by securities laws. It includes terms and conditions related to returns of investment.

When is a promissory note invalid?

In general a promissory note is valid for 3 years starting from the date of execution. However there are other ways as well by which a promissory note becomes invalid. Let me answer what makes a promissory note invalid in India pointwise for your convenience. Here:

• Incomplete or wrongly signed promissory note
• Missing the date or amount in the note
• Missing the interest rate
• Missing the original copy
• Clauses being unclear
• Terms not clear enough
• Changes made without drafting  new agreement
• Passing the limited period of 3 years.

How Can You Prove Promissory Note Validity?

In the process of checking the validity of your note, the court will check the following things:

• The Form of the Promissory Note

A written contract is required for a promissory note to be enforceable and valid; a verbal promise will not be considered a promissory note in court. As a result, lenders often employ standard forms as promissory notes that have been worded according to state law.

• The Monetary Aspect

How long and under what circumstances is a promissory note valid? For as long as it takes to repay the borrowed amount. The sum should be expressed in a legitimate currency, according to the law. Apart from the principle of the loan, it should include:

• a statement of the interest rate (if any)
• the frequency with which scheduled payments will be made
• the date on which the loan will mature (also known as the promissory note maximum duration)

If the note does not include this vital information relating to the loan’s repayment, it cannot be legally enforced.

• The Signature

Even if a promissory note states the sum in the proper currency and has the most comprehensive of terms, if it’s not signed, that’s one of the cases when a promissory note is invalid.

After all, a promissory note is a kind of contract, therefore it will only be binding if the borrower signs the document. The signatures of both parties are important to indicate that they have accepted the terms of the agreement.