What is a Promissory Note: Definition, Types, Elements

Personal loans and credit cards are quite common forms of getting credit. However, there is another form of credit that is also fairly common in today’s times – taking a loan from family members. In fact, there are many who take loans from their family members to set up a business or during difficult times or for any other reasons. 

However, often, the terms for these loans are not explicitly clear but ideally based on trust. Regardless, due to the largely undefined nature of these loans, the paying back part could be confusing – eventually leading towards a dispute between two parties.

To avoid such disputes, you can use the promissory note. Let us understand what it means, what are its types and more.

What is the promissory note?

The promissory note is a special financial instrument, which states that a specific person pays back another person on a specified date, or when demanded by the person who lent the money. These promissory notes can be of various types, with interest or without, and could be paid back on a monthly basis or as lumpsum and much more.

Read more: A complete guide on how to improve your credit score

What are the different types of promissory notes?

The promissory notes can be of two different types:

Secure promissory notes

• The borrower is required to pay collateral in exchange for the loan amount
• In case the borrower is unable to pay the loan back, the lender keeps the collateral (which could be property, goods, services, etc.)

Unsecured promissory notes

• No collateral is needed
• Easier to get an unsecured promissory note if you maintain a good credit score

Read more: A detailed guide on how to check your credit score online for free

What is included in a promissory note?

Here is a list of everything that goes into a promissory note:

• The legal names of everyone that is involved in the promissory note
• The contact numbers and address details of everyone who is involved in the promissory note
• Loan amount is specified
• The date of repayment is also stated very clearly
• In case the lender decides to charge a rate of interest on the loan, then the promissory note mentions it on the basis of the annual percentage rate or APR
• The final amount that has to be paid, i.e., the interest and the principal is also clearly mentioned within the document
• Promissory note also mentions the collateral or security that is provided by the borrowing party
• All the terms of repayment are mentioned, and cases such as late or missed payments can also be included
• If the borrower fails to repay the loan, then the terms for such a case are also noted 
• The borrowers must put their own signature and have a witness in place to confirm that the promissory note was signed. Some states do allow a promissory note without the signature of the lender, but the signatures of the borrower and the witness are of primary importance.

Read more: What are the factors that affect your credit score?

Who are the parties involved in a promissory note?

The two parties involved in a promissory note are the promisor and the promisee. Here, the promisor is the person is borrowing the money and is promising that they will repay the amount according to the terms that are mentioned within the note. On the other hand, the promisee is one who lends the money upon the determined conditions of the promissory note.

Finding it difficult to get credit? Choose Airtel Flexi Credit

Promissory notes are easy to get and if you have a bad credit score, they can be a great way to get some credit from your friends or family members. But what happens when your friends or family members are unable to help you out with credit? That is when you choose Airtel Flexi Credit.

Airtel Flexi Credit is Airtel Finance’s new offering, wherein Airtel has joined hands with some of the most well-known banks and credit lending agencies in India – Axis Bank, DMI Finance, Money View, and Credit Saison India, to offer customers credit without any of the hassles.

Applying for your personal loan from Airtel Flexi Credit is incredibly simple – you just have to open the Airtel Thanks App and get your personal loan approved in an instant. Additional features of Airtel Flexi Credit are as follows: you can choose the EMI and loan tenure as per your convenience, the entire personal loan application journey is digital, there is minimal documentation needed and people with low credit scores can also apply!