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What Are the Different Types of Promissory Notes?

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  • Written By: B. Miller
  • Edited By: Andrew Jones
  • Last Modified Date: 22 November 2016
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There are a few different types of promissory notes issued for various purposes. The two most common types are those that are a type of investment in the company, and those that go along with a loan. Both of these include a person or corporation known as the "maker," the payor, as well as the party that will pay the funds back, often with interest. Companies often sell promissory notes as a type of investment "IOU," but it is important for the investor to research these thoroughly to ensure they are not unwittingly participating in a scam. Notes that are signed as part of a loan are a bit more straightforward.

Promissory notes as investments in a business can be beneficial for both parties. The investor is essentially loaning money temporarily to the business in exchange for eventual repayment, with interest. In this way, both parties can earn money. This is a fairly simple explanation of the process, though there are some things to watch out for. Experts generally recommend avoiding these types of investments if they are noted as "guaranteed" or "insured," as this can indicate a scam. It is also important to make sure that the seller is licensed to sell securities, and it would also be a good idea for a lawyer to look over the paper work first.

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Other types of promissory notes go along with many different types of loans. An unsecured personal loan, for example, will have a promissory note signed by the lender, who is agreeing to pay the funds back. This type of promissory note is a legally binding agreement, but in an unsecured personal loan, may be the only guarantee that the lender will receive the loaned funds back from the borrower. Promissory notes may also be secured by certain things, such as a home or car; then, if the borrower defaults on the payment, the house may be foreclosed upon, or the car repossessed in order to fulfill the obligation of the promissory note.

A demand promissory note is yet another type. The funds specified in this type are not due until they are demanded by the lender. This is an option for some people, but the lender is free to demand the funds at any time, often with just a few days' notice. Regardless of the type of promissory notes an individual is signing or investing in, it is very important to read and understand them thoroughly to avoid potential costly losses due to scams or extremely high interest charges.

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