Explain the Essentials and Types of Promissory Note.

A promissory note is a simple kind of instrument of credit in which the debtor himself makes a promise to his creditor to pay the amount of money at the promised date. To make this document legal, the revenue stamps are affixed according to the value of the promissory notes.

We can define promissory notes as “An instrument which can be in written shape by making a promise to pay a specific amount on demand at a fixed date and time or unconditional order of a certain person or to carrying of the instrument”.

Parties of Promissory Note

There are two parties to a promissory note;

1. Maker of Drawer

The person who makes the promissory notes to pay the amount stated therein is called the “Maker of Promissory Note”.

2. Payee of Drawee

The person to whom the note is payable unlike other instruments, in promissory notes. Drawee receives the amount of the instrument.

Types of Promissory Notes

There are two main types of promissory notes which are as under;

• Inland promissory notes
• Foreign promissory notes

1. Inland Promissory Notes

In this kind of promissory note, the maker and the Drawee belong to the same country. The inland note may be individual or joint notes.

2. Foreign Promissory Notes

In foreign promissory notes, the maker and the Drawee belong to different countries and also is an individual or joint note.

Essentials of Promissory Note

Promissory notes must contain the following essentials elements;

1. It should be in written shape.
2. It must contain a guarantee to give money.
3. The promise to give money must be unconditional.
4. It must be signed by the maker.
5. The maker should be a certain person.
6. The payee must also be a certain person.
7. The amount must be certain.
8. Payment should be of money only.
9. The time or period of payment should be fixed.

Endorsement of Promissory Notes

Promissory notes can be transferred to another person by endorsement. The Drawee puts his signatures on the back of the note and delivers the promissory notes are called “Endorser” and to whom the note is transferred is called “Endorsee’.

How to Create Promissory Notes?

The following essential steps are required to write promissory notes, which are as under;-

1. Phrase of Promissory Notes

The word “promissory note” must be there in the instrument and show the way of verbal communication.

2. Parties

There must be at least two parties in creating promissory notes i.e.

1. Maker        2. Payee

3. Principal Amount

It is essential to mention a particular principal amount in the instrument.

4. Interest Rate

It is also necessary that the interest rate should be fixed and shown in the instrument.

5. Maturity Date

The date of disbursement must be fixed and shown in the instrument.

6. Terms & Condition

It is also essential that both parties are agreed upon terms & conditions, which is fixed through mutual consent.

7. Signature

Promissory notes must be signed by the maker.

Difference Between Promissory Notes and Bill of Exchanges

1. Promissory note is a promise to pay whereas the bill of exchange is an order to pay.
2. A promissory note is only between two parties whereas bills of exchange have three parties.
3. A promissory note is no need of acceptance whereas the bill of exchange must be accepted.
4. In Promissory note, the maker is primarily liable whereas in the bill of exchange drawer is not primarily liable.
5. A promissory note is never drawn in a set whereas the bill of exchange in case of a foreign bill drawn inset.
6. A promissory note is not necessary protesting after dishonored, whereas the bill of exchange in case of foreign bill exchange must be protested.

Conclusion:-

We have come to the conclusion that “A promissory note is basically a lawful agreement or financial instrument between two parties to record details of a loan transaction”. The promissory note is a negotiable instrument that is widely used all over the countries for business transactions.

It is usually held by the payee and is a promise to return back money, which is borrowed through a loan by mutual consent of both the parties’ borrowers and lenders. It is a completely different element from the Deed of Trust. The loan is always active to the whole time until the note hold by the lender. At the time of loan paid as it is written or “Paid in full” then it returns to the borrower.