Is a Promissory Note Legally Enforceable?

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Have you ever signed a promissory note? Are you confused as to the differences between a loan versus a promissory note? Are promissory notes even legally enforceable? Well, you’re definitely come to the right place. Clients often ask us a multitude of questions involving this topic, so I thought I would give a general overview of this commonly used document in the world of business today.

Loan vs. Promissory Note

Both promissory notes and loan agreements fulfill the same purpose. Both are tools that demonstrate that a debt is owed between a borrower and a lender. However, in practice, a promissory note is generally not as detailed as a loan agreement. A loan agreement includes additional details regarding the promises and obligations of the parties as well as the ability to include a guarantor as co-signer. Both agreements allow you to specify property as collateral for the loan, if necessary. We’ve all read the ridiculously lengthy loan agreements when financing a new vehicle. Do you remember your parents signing as a co-signer on your first apartment lease in college? Well, these are all examples of the more detailed loan scenario.

I think we should also briefly discuss compound versus simple interest. Simple interest is interest that is only calculated on the unpaid principal amount of the loan. Compound interest is interest that is calculated both on the unpaid principal amount and the unpaid interest.

Is a Promissory Note Legally Enforceable?

A promissory note is a legal instrument similar in nature to any contract. To make a contract enforceable, it must contain certain legal conditions which are an offer, an acceptance of that offer, and consideration, also known as value. Contracts indicate the type and amount of payment for services or goods rendered. In the case of a legal promissory note, the contract will be structured around the amount of money or capital loaned and the terms of repayment of the promissory note.

As with any contract, a promissory note contains terms and conditions associated with an agreement that has been established between two parties. It details the total amount of money or capital loaned, the interest rate charged, and the timeline for repayment. When all of these conditions are addressed in the details of the promissory note and it is executed correctly, the promissory note meets all the elements of a legally binding contract.

Due-on-Demand Clause

An “on-demand” loan means that repayment is not set to a fixed schedule of payments. Repayment will be due when the lender gives the borrower notice that the loan needs to be paid back. In most cases, a promissory note will stipulate a mandatory notice period that the lender must give to the borrower before the loan is repayable. For example, if a promissory note stipulates a 60-day notice period, then when the lender gives notice to the borrower, the borrower will have 60 days to gather and deliver the funds.

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As always, the Kazi Law Firm is standing by to help you in your time of need. Don’t hesitate to contact us today. We specialize in real estate law, landlord-tenant disputes, immigration, and wills & estate planning. Family is at the core of our practice. Just as we treat our family with respect and understanding, we treat yours. Come join the Kazi Law Firm family today!

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