If you borrow a sum of money as part of a student loan, home mortgage, automobile loan or other major investment, the chances are good that you will be required to sign a promissory note as part of this process. Defined simply, a promissory note acts as a legally enforced pledge to repay funds you have borrowed. Virtually all promissory notes must include the names of the borrower and lender, the specific amount of money that has been transferred to the borrower and the terms of the loan. Once you decide to sign this promissory note, you have entered into a contractual agreement that can be enforced by law. Fortunately, you will enter this agreement knowing exactly what the face value of your note is.
A promissory note acts as a contractual, legally recognized guarantee for repayment. The face value of the promissory note is directly linked to the value of the debt mentioned in the note.
What the Face Value of a Promissory Note Is
On a fundamental level, a promissory note does not carry its own universal face value. In fact, a promissory note is not a store of value, but a contractual obligation that requires one individual to pay back a specified sum of money to the other named party.
Technically, the individual who has borrowed the money mentioned in the promissory note is referred to as the promisor. The promisor borrows these funds from the promisee. The promisee can be virtually any individual or organization who has offered the loan to the promisor. For example, if you have applied for federal student loans to help finance your college education, the promisee will be the U.S. government. In some situations, these terms could be substituted for "obligor" and "obligee," both of which carry the identical definitions of the aforementioned terms.
Investing in Promissory Notes
Even though promissory notes are not a form of redeemable currency, they are often bought and sold by investors seeking to benefit from investing in the debt marketplace. Promissory notes will often be sold at half their value to investors seeking to reap the benefits of this particular asset. That being said, it then becomes the responsibility of the investor to ensure collection on the debt.
Limitations of Promissory Notes
It is important to remember that a promissory note is not a form of legal tender. Even though this document details a specific financial obligation between the promisor and promisee, the note cannot be redeemed at a bank for funds. In the event that the promisor defaults on their loan obligations, the promissory note can be used for consequent legal actions but cannot act as a substitute for the promisor’s own failed payments.
That being said, the promissory note can be an effective method to help ensure that a promisor does live up to the repayment terms listed. In the event that the promisor begins to skip payments or refuses to pay entirely, the promissory note can help ensure that they return to their payment schedule or risk serious penalties to their credit score and other consequences.
In the vast majority of situations, a promissory note is transferred as part of an unsecured loan, meaning that no collateral has been offered by the promisor in order to receive the funds from the promisee. Because of this, the promisee will not typically be able to make a claim to any property in the event of loan default. These circumstances will change, obviously, in the event that the promissory note is written as part of a home mortgage.
Other Details to Consider
Within the promissory note, there should be an explicit set of instructions concerning exactly how the funds that have been borrowed will be repaid. This includes a detailed overview of the specific payment installments and the schedule that the borrower must adhere to.
- U.S. Securities and Exchange Commission: Broken Promises: Promissory Note Fraud
- Financial Web: What is a Promissory Note?
- Promissory note - Wikipedia
- U.S. Securities and Exchange Commission. "Promissory Notes." Accessed Aug. 21, 2020.
- Sacramento County Public Law Library. "Real Property as Security for a Loan." Page 1. Accessed Aug. 21, 2020.
Ryan Cockerham is a nationally recognized author specializing in all things innovation, business and creativity. His work has served the business, nonprofit and political community. Ryan's work has been featured at Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.