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SUNDAY, JUNE 20, 2021

What is a promisory note?

What is a promisory note?

Are you looking for a way to draw up a contract or borrow money with low interest rates and no set minimum loan amount? You have often heard of the term promissory note, but you do not know exactly what it is and you do not know it?

No problem, with our promissory note guide we would like to explain to you the most important things about the term promissory note and show you both the advantages and disadvantages of a promissory note. What are the basic conditions and what should you pay attention to? Don’t worry, we will explain everything to you.

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The most important facts in brief

  • Promissory notes are, in a sense, the admission of a debt, but they are not counted as securities and, in this sense, cannot be sold so easily.
  • If no date of repayment is indicated on the promissory note, the statute of limitations is three years from the conclusion of the contract. However, this can be extended by payment reminders and dunning letters.
  • To be on the safe side, it is advisable to record all important information on the promissory note and have it signed by both parties.

Glossary entry: The term promissory note explained in detail

In this section we would like to explain you everything important about the topic promissory note. We will start with the concept of what a promissory note is and then we will go into the general conditions and the function of a promissory note.

What is a promissory note?

According to the dictionary, the promissory note is defined as: “.

[…] a written certificate stating that a person owes another person a specific performance (usually a sum of money).” 1 It is important to note that the debtor can demand the receipt and the return of the promissory note when the due date is paid.

The promissory note or borrower’s note loan is not defined in the law and therefore does not count as a security, but as a document that facilitates proof. Moreover, the borrower confirms that he/she has received the loan contribution and the burden of proof is shifted from the creditor to the debtor.

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How does the promissory note work?

As mentioned earlier, the promissory note is an admission of debt. The debt is shifted from the lender to the borrower. Promissory notes are generally processed as debt financing for private individuals or companies and are a popular means of being used as a reliable store of value among private individuals.

In practical terms, a promissory note has significance mainly with a loan and usually arises from loan or credit agreements. Since the promissory note is considered a substitute for money, it can be used as a cashless means of payment. However, a creditor does not have to accept a promissory note as settlement of the loan, so the use of a promissory note is limited.

The term of a promissory note usually runs for several years and the repayment is settled either in monthly intervals, or what has been agreed upon. The form of how much is repaid and when is flexible and is finalized between the two parties. 4

Caution Promissory notes can hardly be resold

What legal conditions should I be aware of with a promissory note?

According to §781 of the German Civil Code (BGB), a promissory note is a contract recognized as a debt and must be drawn up in writing. In civil proceedings, a promissory note is considered evidence. When filling out a promissory note, the following points should be observed:

  • Title “Promissory Note”
  • Name and address of the lender/borrower
  • Sum in numbers and words
  • Date when this sum will be repaid
  • Interest rate
  • If agreed, which installment amounts will be paid and when
  • Place and date of signature
  • Signature of both parties

Many sample templates for promissory notes can be found on the Internet

Generally, it is advisable to put everything in writing, as it can be more easily understood in the event of a lawsuit. Credit limit and amount can be agreed upon individually and should therefore definitely be noted on a promissory note.

Thus, if the date is exceeded by more than three years, one can no longer claim a debt. However, this only applies if the debtor did not receive a payment reminder. If the debtor was reminded in writing several times during the period, the limitation period is extended.

What are the advantages and disadvantages of a promissory note?

In this section, we would like to list the advantages and disadvantages of a promissory note so that you can get a better picture of it. On the one hand, a promissory note offers high flexibility, but on the other hand, a promissory note is a higher risk for the creditor and requires several securities.

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Advantages

  • High flexibility
  • Tailored to individual needs
  • Low effort for the creation
  • Favorable additional fees and interest
  • No minimum loan amount required

Disadvantages

  • With large sums often high risk for the creditor
  • Many options for repayment, but unscheduled repayments are excluded
  • Requirement for creditworthiness very high
  • Other collateral must be provided

What is the difference between promissory notes and bonds?

Promissory notes and bonds are two different things and differ in basic dimensions. To help you get a better idea of the differences, we have created the following table.

Promissory note

  • Variable interest rate
  • Large denomination (10.000,-)
  • Flexible term
  • Loan
  • Not a security, transfer by assignment
  • Institutional investors (banks, savings banks)

Loan

  • Fixed interest rate
  • Small denomination (mostly 1.000,-)
  • Debenture
  • Fixed term, usually 5 years
  • Security, stock market-oriented
  • Institutional investors (banks, savings banks) + private investors

Promissory notes and bonds also have their individual advantages and disadvantages, which we list here.

As you can see, promissory notes and bonds are very different and have their own advantages and disadvantages. Therefore, it is advisable to weigh economically which type of financing makes sense for individuals or companies and which does not.

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Conclusion

A promissory note is particularly well suited for private individuals and companies that do not want to have a minimum loan amount. In addition, promissory notes are very flexible and can be individually adapted to the contracting parties and their circumstances.

If you issue or sign a promissory note, keep the above points in mind to avoid any misunderstandings.

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