Financial Dictionary -> Loans -> Note

In finance and accounting, a note, or promissory note is a contractual agreement by the creator of the note to make a payment of money to a payee upon the completion of specified requirements or by a specified time in the future. Unlike IOU's, a promissory note is a legally binding contract that promises to pay, not just acknowledges the debt. The most common form of promissory note is the Federal Reserve Note, which is the paper fiat currency used in the United States, issued by the private Federal Reserve Bank of America. Technically they are a promise to pay the holder of the note its true value in gold reserves, however money is no longer backed by reserves and is simply valued by public perception. Thus notes are now considered legal tender for "all debts, public and private".

The contract between a borrower and a lender for any kind of loan or credit can also be called a promissory note, even if it is not overtly related to the physical piece of paper like a bank note. For example a mortgage contract is a promissory note that lays out the terms of the agreement, such as the principal amount, interest rate, length of the term, repayment increments, any collateral etc. In this case it is the borrower the borrower that must meet the requirements even though the lender probably drew up the agreement or note.

The person or entity that makes the promise is called the maker, and the person or entity that receives the promised payment is called the payee.