What Is a Promise to Pay Agreement?

What Is a Promise to Pay Agreement?
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While a promise to pay agreement is exactly what it sounds like – a promise to pay, or repay, money – it is much more than that. It is a contract between two parties that outlines the terms of the agreement and provides legal protection if one party tries to renege on the deal. Such an agreement is known as a "promissory note."

What is a Promise to Pay Agreement?

Promise to pay agreements come into play with any type of loan. A mortgage contract, for example, is a common form of secured promise to pay agreement. This contract stipulates that the lender can seize and sell the home if the borrower doesn't pay according to the agreement's terms. A private, unsecured loan between two people typically requires a promise to pay even if there is no set repayment date beyond the agreement to pay when the borrower can.

Moving Beyond Loans

Promise to pay agreements are not just for loans. Other agreements include promises to pay for services rendered and promises to pay for performance. For example, if you sign and employment contract, your employer is promising to pay you a predetermined amount for each our, moth or year of labor you provide. Courts look at other types of agreements as binding as loan agreements. According to the New York Law Journal, the Supreme Court of New York ruled in 2012 that an employer must honor an oral promise to pay an employee a performance bonus.

Is an Oral Contractual Promise to Repay a Loan Binding?

Oral agreements are difficult, though not impossible, to prove in court if the payer defaults. In theory, you can loan or borrow money on a handshake, but what happens if someone doesn't pay what they promised? How are you going to prove the terms of the agreement in court? Typically, the party receiving the money per the agreement should only rely on an oral promise to pay agreement if he can afford to take a loss on the amount owed. According to Nolo, a written agreement is the way forward. This should include the amount, or principal, of the loan, interest rate and the repayment schedule. A written promise to pay agreement will not prevent a payer from not honoring the agreement, but it will provide proof of the terms should the payee have to sue the borrower to get his money.

Things to Consider with a Promissory Note

The federal government regulates promise to pay loan agreements under the Truth in Lending Act. Lenders must provide borrowers with a statement that explains the cost of the loan, when a lender can assess charges, such as late fees, beyond the interest charges and what rights the borrower has. Many states govern the amount of interest that lenders charge through usury laws that prevent lenders from charging exorbitant rates on loans. If you are unsure about the laws in your state, consult an attorney before entering into the agreement. If you are the lender, you must report the interest as taxable income when you file your state and federal income taxes.