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Negotiable Instruments in Business: History, Types & Uses

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

Did you know that when most people buy cars, they use what is called a negotiable instrument? Learn what makes this type of transaction a negotiable instrument and how long negotiable instruments have been around.

Definition

Picture yourself buying your dream car. You have wanted this car for years. With such a high price tag, though, you aren't going to just walk into the car dealership with that much cash. That's just asking for trouble. Instead, you sign documents from the car dealer that say you will pay off the car in five years by making monthly payments.

What have you done? You have just used a negotiable instrument to pay for your car. A negotiable instrument is a document promising payment of a specific amount to a specific person. The document contains both the payee name as well as the amount to be paid to the payee.

History

Early forms of negotiable instruments have existed since ancient Babylon. One notable example is in 8th-century China, when the feitsyan ('flying money') document was used as a way to safely transfer large amounts of money over long distances. Because the feitsyan represented the money, no actual money had to be carried. Over the years, while the documents have changed in looks, the purpose remains the same: a promise to pay a specified amount to a specific person.

UCC

Fast forward to today and we have the Uniform Commercial Code (UCC), which sets out certain criteria that all negotiable instruments must meet. According to the UCC, for a document to be a true negotiable instrument, it must meet these requirements:

  • The promise to pay must be unconditional.
  • The amount to be paid must be a fixed amount, which can include interest.
  • The name of the payee must be included.
  • The promise to pay must be either on demand or at a specified time.
  • The promise to pay must not include any additional tasks to be taken by the person promising to pay, except the payment of specified funds.

Types and Uses

Today, there are several types of documents that qualify as a negotiable instrument according to the UCC. I am sure you have either seen or used one of these yourself.

The most common negotiable instrument in use today is the check, which people use to send bill payments and to pay for things at the store. Nowadays people tend to use credit or debit cards, but before they became so popular, people mostly used checks. These are little pieces of paper that people fill out to show who they are paying, how much they are paying, and when.

Another negotiable instrument in use today is the promissory note, which is used to secure loans for businesses or when buying a house or car. Such a note describes the amount to be paid, by whom, to whom, by when, and for what. It also includes the interest to be paid.

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