Let's imagine for a minute that you want to borrow $5000 from your rich Uncle WiseGEEK. After the initial shock wears off, he agrees to loan you the money. But before any exchange can take place, your uncle wants the specific repayment terms spelled out in writing and signed by both parties. This document would be considered a promissory note and is legally binding. No matter where you go or what you do with the money, Uncle WiseGEEK can always prove the existence of the original loan.

A promissory note, often shortened to 'note', should provide specific details on the amount of the original loan, known as the principal, the repayment schedule and any applicable interest rate. It is not unusual for a promissory note also to contain details such as grace periods or penalties for defaulting. Although either party may draw up a promissory note, it's usually in the best interest of the lender to make sure all of the important elements are included. Once both parties sign a promissory note, the precise terms of that contract are the ones which will be enforced during any future legal proceedings.

A promissory note is not the same as an informal IOU. A personal IOU may acknowledge that a debt exists, but the specific repayment details may not be included. Commercial lending companies often require borrowers to read and sign a very detailed promissory note before a loan can be deposited or processed. The borrower should hold onto this note until the loan becomes due, since it contains important information on interest rates and amount of the principal to be repaid.

The production of a properly worded and signed promissory note is usually enough to prevail in any legal proceeding against the borrower, but there are some exceptions. If the borrower can prove he or she signed the document under extreme duress, meaning under undue pressure from the lender, then a judge may rule the note unenforceable. The borrower must sign a completed document, not merely place his or her signature at the bottom of a blank page. A promissory note should not contain conditions which would be considered illegal elsewhere, such as an impossibly high interest rate or additional penalties not spelled out in writing.