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What Is a Demand Promissory Note?

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  • Written By: Wanda Marie Thibodeaux
  • Edited By: O. Wallace
  • Last Modified Date: 30 October 2014
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A demand promissory note is a negotiable financial instrument through which a person, the borrower, makes a promise to pay back another individual, the lender, on demand. These types of promissory notes have risks for both the borrower and lender. Using this type of note makes planning for loan repayment harder and is not necessarily a substitute for a formal loan contract.

A key characteristic of a demand promissory note is that the note has no payment date by which the money is due. Sometimes this works to the borrower's advantage. For instance, if the lender decides that repayment is not necessary immediately, the borrower has more time to gather repayment funds. If the lender calls in the note immediately, however, the borrower might not have the funds to pay. These types of notes make it very difficult to make any sort of concrete repayment plan, because a solid repayment plan requires the borrower to know when the lender will want his money back, not just the amount that will be due.

The lack of a set payment date means that lenders take a risk in accepting demand promissory notes. To offset this risk, a lender may set a high rate of interest on the amount borrowed or make other arrangements such as not accepting partial payments. This is at the discretion of the lender. Borrowers have a responsibility to determine whether they realistically can meet these additional note terms before they sign it.

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When a lender calls in a demand promissory note, the borrower has to come up with the money for repayment, either in full or in part, as stipulated in the note. Typically, the borrower has just a few days to find the funds he needs. The borrower has to be ready to repay the lender at any time.

The contents of a demand promissory note can vary depending on the lending agreement, but a very basic note always includes the names and addresses of the lender and borrower, the amount borrowed, terms for repayment and the interest rate, if any. These types of notes also include the date on which it is drawn, conditions for default and any laws to which the note adheres. It is standard for a demand promissory note to include spaces for the lender, borrower, co-signers and witnesses to sign and date the document.

Importantly, a promissory note, including a demand promissory note, is not necessarily the same thing as an IOU or contract, although the terms sometimes are used interchangeably. IOUs simply acknowledge that the borrower has a debt, whereas the promissory note specifically states that the borrower must pay. Loan contracts often go into much more depth than the promissory note, so the promissory note is not always sufficient for protecting a lender. In some jurisdictions, loan contracts and promissory notes are legally distinct for this reason.

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Diwrecktor
Post 2

@Sultank- The demand promissory note is actually a good idea if the money is being loaned or borrowed between family and friends. The terms of the note can be worked out so that it protects both parties.

Sultank
Post 1

A demand promissory note sounds risky. I don't think I like the idea of paying back the money at a moment's notice. I guess this type of promissory note might be okay for someone who really needs the money and has no choice but to agree to the terms.

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