A promissory note is a document that is written by one party promising to pay an amount owed to another party by a certain date. This is also known as an IOU letter, payment on demand letter or payment on arrival letter.
This kind of document is used by people who want to have written evidence of a loan, but do not want to have a formal loan agreement drafted and signed by both parties. This is commonly used for loans of money between family members or friends.
In Australia, promissory notes are usually governed under the Bills of Exchange Act 1909 (Cth). However, if one becomes a complex financial product then it would be covered under the Corporations Act.
What information needs to be included in a promissory note?
In order for a promissory note to be legally enforceable in case of non payment by the agreed time, it should contain the following information:
- name of lender;
- name of borrower;
- amount borrowed;
- addresses of both parties;
- telephone numbers of both parties;
- payment terms (when and if interim payments are needed);
- interest rate charged;
- terms for late or missed payments;
- any security arrangement due to non payment or failure to perform agreement in full;
- a date for when the loan will be repaid in full; and
Who needs to sign a promissory note to make it enforceable?
The only person who needs to sign the promissory note is the borrower as they are the one who is making the promise to pay back the money.
It does not have to be witnessed by a JP or a Notary Public, but if it is signed by a witness who has witnessed the borrower signing the note, it would hold more weight.
A promissory note does not need to be signed by the lender – it is still enforceable without their signature.