DIY Promissory Note

Identification

• There are three basic elements to a promissory note that must be identified first in the document. The promisor (the obligor in contract law terms) is the person executing the document and promising to pay back a debt. The promisee is the person for whose benefit the promise is made. The third element to be indentified is called the consideration. For a contract to be valid, there must be mutual consideration. In terms of a promissory note, the promisee provides consideration to the promisor in the form of a loan of some sort, and the promisor reciprocates by executing the note.
  
  

Terms

• The terms of repayment often constitute the major content of the promissory note. Repayment can be made in periodic installments, in a final lump sum, or in a balloon that consists of regular small interest payments and a final lump-sum payment of the principal. The statement of terms can also describe additional fees for late payments as well as a payable-on-demand clause that allows the promisee to demand payment at any time. The terms should also describe how or where payment should be made, such as by check payable to a certain party and delivered to a certain place.
  
  

Other Clauses

• Several other clauses can be added to a promissory note to make it more effective. These include language that describes whether early payment is allowed, and how the parties will proceed in the event the promisor defaults on his obligation. An acceleration clause allows the promisee to demand full payment if a regularly scheduled payment is missed. One of the most important additional aspects of a promissory note is whether the promisee accepts collateral on the debt in addition to the note. By identifying as collateral an actual piece of property, such as a car or a piece of equipment, the promisee can file a lien against the collateral in the event the promisor goes bankrupt.