Documents · Glossary

What is a promissory note?

A promissory note is a written, signed promise by one party to pay a stated sum to another, either on demand or on a fixed date. It records the debt and the repayment terms in a short document, and it stands as evidence of the obligation without needing the underlying transaction to be described.

It is the shortest useful document in lending, which is both the appeal and the limitation. Two pages will get the money back from a cooperative borrower and will not help much with an uncooperative one.

Indunil Asanka · Co-founder

6 min read · Published 12 September 2026

Three ways a loan gets written down
	Promissory note	Loan agreement	IOU
Length	One or two pages	Ten to forty pages	A line or two
Signed by	The borrower only	Both parties	The borrower
Contains covenants and security	No	Yes, usually	No
States repayment terms	Yes, amount, rate and dates	Yes, in detail, with events of default	Rarely
Transferable	Often, by endorsement	Only under its assignment clause	No
Suits	A simple loan between parties who trust each other	Secured or substantial lending	Nothing you care about recovering

What has to be on the page

An unconditional promise to pay, in words that leave no room for a condition. The principal amount, in figures and words. The payee, named precisely, and the maker, named as the legal entity that owes the money. The interest rate, if any, stated as a rate per annum with the method of calculation, since a bare percentage invites an argument about simple against compound. The repayment terms: on demand, on a fixed date, or by instalments with amounts and dates. The place of payment. The date and place the note was made. And the borrower's signature. Where interest or instalments are involved, a short schedule showing each payment and the reducing balance prevents most later disputes about what was actually paid.

Note against loan agreement

A promissory note is one sided: the borrower promises, and the document does not need the lender's signature to work. A loan agreement is bilateral and does much more. It sets conditions before the money is advanced, imposes covenants during the term, defines events of default with precision, deals with security over assets, addresses what happens on a change of control, and allocates costs. All of that matters where the amount is significant, where there is security, or where the lender needs to monitor the borrower's position. For a straightforward advance between parties who already trust each other, a note plus a short covering agreement is proportionate and far more likely to be signed.

Default, acceleration and demand

The clause that earns its keep says what happens when a payment is missed. Without it, a lender faced with a missed instalment can usually only claim that instalment, and has to wait for each subsequent one to fall due before claiming it. An acceleration clause makes the entire outstanding balance immediately payable on default, which is what turns a note into a practical instrument. Define default plainly: a payment not made within a stated number of days of its due date, the borrower becoming insolvent, or the borrower breaching any other obligation in the note. State that the lender may demand the whole balance and that failure to demand immediately is not a waiver.

Security, guarantees and the limits of a note

A promissory note on its own is unsecured, which means the lender ranks with other unsecured creditors if the borrower fails. Where the amount justifies it, security is taken separately: a general security agreement over company assets registered on the personal property securities register, a mortgage over real property, or a guarantee from a director or parent company. Each of those is its own document with its own formalities, and a guarantee in particular is often executed as a deed because the guarantor is receiving nothing. A note that refers to security without the security document existing is a common and expensive gap in family and small business lending.

Where notes are a specialist instrument

In the United States, a promissory note that meets the requirements of the Uniform Commercial Code can be a negotiable instrument, which makes it transferable by endorsement and gives a good faith purchaser stronger rights than an ordinary assignee. The United Kingdom has equivalent rules in bills of exchange legislation, which also applies in Australia and other common law jurisdictions with local variations. This is why the wording matters: an unconditional promise to pay a fixed sum is negotiable, and the same document with a condition attached is not. For a private loan between two known parties the distinction rarely matters. For anything intended to be sold or discounted, it matters a great deal.

Family lending, which is where most notes live

A parent lending a deposit, a sibling funding a business, a family company advancing to a director: these are the transactions promissory notes handle every day, and they are also the ones done on a handshake and regretted. The note serves a purpose beyond enforcement. It records that the money was a loan rather than a gift, which matters for tax, for estate administration and for family law, and it fixes the terms while everybody is on good terms. Sign it, date it, keep a copy each, and record every repayment against the schedule. Where the borrower is a company, check who is signing and whether they have authority, because a note signed by somebody without it may bind nobody.

Questions people ask

Does a promissory note need a witness?

Not as a general rule, since it is not a deed. A witness is worth having anyway for a substantial private loan, because it makes the signature harder to dispute later. Where the note is executed as a deed, for instance because the lender wants the longer limitation period, then the usual deed formalities including witnessing apply.

Can a promissory note be interest free?

Yes, and family loans often are. Say so expressly rather than leaving the interest clause blank, because silence invites an argument about whether a statutory or reasonable rate applies. Note that an interest free loan can have tax consequences in some structures, particularly loans involving companies and their shareholders.

What is the limitation period on a note?

Generally the same as for any simple contract debt, six years in most Australian states, running from the date the payment fell due. For an on demand note the position is more complex, since the debt may not fall due until demand is made. Keeping the note as a deed extends the period considerably, which is one reason lenders sometimes do.

Is an IOU legally enforceable?

It can be evidence of a debt, and it is weak evidence because it rarely states the terms. A court may find a loan repayable on demand, and the borrower may argue it was a gift, a partial payment or something else. The gap between an IOU and a one page note is fifteen minutes of writing and a great deal of certainty.

Can a promissory note be transferred?

Often, depending on how it is drafted and the jurisdiction. A note payable to a named person or order is generally transferable by endorsement, while one made payable only to a named person is not. If transferability is not wanted, say so on the face of the note, which is common in family lending where the lender has no intention of selling the debt.

What if the borrower pays late but does pay?

Accepting a late payment does not by itself waive the right to enforce, particularly where the note says that no failure to enforce is a waiver. It is still worth acknowledging the late payment in writing and confirming that the terms continue to apply, because a pattern of accepted late payments can support an argument that the parties varied the arrangement by conduct.

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Sources

Written and checked by the OneCraft team. Last checked 12 September 2026.