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What Is a Promissory Note? - Definition & Example

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  • 0:00 Promissory Note: Defined
  • 1:31 Example
  • 2:40 Lesson Summary
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Lesson Transcript
Instructor: Michael Cozad

Michael is a financial planner and has a master's degree in financial services.

This lesson will provide an overview of a promissory note in lending. You'll learn the definition of the term and look at a common example of a promissory note.

Promissory Note: Defined

Sandy is about to enter her freshman year at State University. Unfortunately for Sandy, her parents have refused to provide any financial help after Sandy graduates from high school. With very little savings, Sandy is contemplating applying for financial aid via student loans.

Sandy meets with the financial aid officer at State University. The aid officer tells Sandy she needs to apply for $10,000 of student loans. Sandy is distressed upon hearing this but knows that a college education is for her. The only way for her to begin college is to apply for student loans, which Sandy does promptly.

During the application process, Sandy keeps seeing that the student loan lender is going to require her to sign a promissory note before they release the $10,000 to State University. Sandy is unsure of the meaning of this but does not want to call the 1-800 number listed just to ask a simple question. She decides to continue the application process and finally reaches the end.

'Please sign the promissory note,' reads the header. Sandy opens the promissory note, and after reading the note, she thinks to herself, 'This makes sense! I wish they had told me it would be this simple.'

Sandy's promissory note stated that upon graduation, she promised to pay the lender a certain amount of money by a certain date. Simply put, a promissory note is a written promise by one party to pay another party a certain dollar amount on a certain date.

Example

In Sandy's case, she's agreeing that upon graduation (which is stated as 06/10/2018), she will pay $188.71 to the student loan lender each month, by the first of each month, for 60 months, at a 5% interest rate per year.

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