How does a promissory note work?
A promissory note is a legal document saying you will pay another person or entity a certain amount of money over a set period of time. It’s a legally binding document, which means you could be taken to court and sued if you don’t repay the loan.
While promissory notes are common in mortgages, they can also be used for other types of loans. Memphis-based real estate agent Ginia Williams said she used a promissory note when she became an investor in her friend’s business.
“[A]n attorney [recommended that I] complete a promissory note,” Williams said. “Terms and stipulations vary depending on the agreement. A promissory note can be invalid if all parties do not sign the agreement."
A promissory note can be invalid if all parties do not sign the agreement.”
Once you’ve paid back a loan in full, your lender releases the promissory note to you. This shows that all parties have fulfilled the obligations outlined in the note and that the lender no longer has a lien on the property. You’ll want to save a copy of this document in your personal files in case any legal issues arise later.
What’s included in a promissory note?
Lenders use promissory notes when issuing loans because they legally tie the borrower to the loan itself. The promissory note describes specific details of the loan, such as:
- Principal amount: How much you’re expected to repay
- Interest rate: Calculated as a percentage of the loan, will be fixed or variable
- Parties involved: The names and addresses of the borrower and the lender
- Repayment terms: Includes detailed information about how and when the loan will be repaid, such as a payment schedule, due dates and details about late fees (if applicable)
- Loan maturity date: When the loan will be completely paid off and how much you will have paid in all, including principal and interest
- Prepayment penalties: The cost of repaying your loan early (if applicable)
- Default terms: The consequences if you fail to repay the loan as agreed
- Signatures: Both the borrower and lender need to sign the document, indicating their agreement to the terms
- Collateral (for secured notes): If the promissory note is secured, it will specify the asset(s) that the borrower has pledged as collateral in case they default on the loan
Types of promissory notes
Promissory notes can be either secured or unsecured, depending on the loan.
Secured promissory notes
A secured promissory note is backed by collateral. This means the lender can take possession of, and sell, the item of value should you default on the loan. With a home loan, the purchased property serves as collateral, which lessens the lender’s financial risk. If you default, the lender can collect proceeds from the sale of property and recoup some or all of its losses.
Unsecured promissory notes
Unsecured promissory notes are not backed by collateral, though the borrower is still legally obligated to repay the loan. While mortgage loans are secured, other types of loans, including personal loans, are typically unsecured. Often, interest rates for unsecured loans are higher because the lender considers itself at more risk.
Master promissory notes
A master promissory note is used for multiple loans by the same borrower. It’s still a written promise to repay debt, but it covers more than one particular loan. Master promissory notes are often seen with student loans because college students typically have to take a new loan at the start of each year.
What are the pros and cons of promissory notes?
Consider the pros and cons of promissory notes:
Pros
- Legally binding, benefiting both the lender and borrower
- Covers all terms of the agreement
- Serves as a promise to repay a loan
Cons
- May have a higher interest rate if the note replaces a traditional lending agreement
- A secured promissory note requires collateral
- Risk of default, meaning the borrower is unable to replay the loan
Promissory notes vs. other mortgage agreements
Most, if not all, lenders require a signed promissory note before issuing a loan. However, whether you have a mortgage or a deed of trust will depend on what state you live in.
Promissory note vs. mortgage note
A mortgage note is a type of promissory note. A promissory note and a mortgage note are both legal documents related to borrowing money to purchase property, but they serve different functions and contain different information. In addition to the information found in a promissory note, a mortgage note also includes details about the property being used as collateral, the procedures in case of default and foreclosure, and any specific terms related to the mortgage loan, such as whether it's a fixed-rate or adjustable-rate mortgage (ARM).
Promissory note vs. deed of trust
While promissory and mortgage notes are an agreement between the lender and the borrower, a deed of trust is an agreement between the lender, the borrower and a trustee. The trustee is a neutral third party, like a title company, that agrees to hold the title until the loan has been paid in full. It gives the lender a claim to the property while you still owe money and the legal right to sell your home if you stop making payments on the loan.
FAQ
What makes a promissory note invalid?
A promissory note can be invalid if either the lender or the borrower doesn’t sign it. The loan terms, like the repayment date and the loan amount, must also be present. To ensure that a promissory note is valid on a mortgage, you can consult with an attorney who specializes in real estate law.
Can a promissory note be altered?
A promissory note can be altered or amended, but any changes must be agreed upon and signed by both the lender and the borrower. This agreement is usually documented in a formal amendment to the original note, clearly stating the changes to the terms.
Does a promissory note need to be notarized?
Whether a promissory note needs to be notarized can depend on local laws and the specific terms of the note. In many cases, it's not required, but having a promissory note notarized can add an extra layer of authenticity and protection for both parties.
How is a promissory note repaid?
How a promissory note is repaid depends on the term of the agreement, which will outline the amount and length of the loan, interest rate and repayment schedule, among other factors. Generally, mortgage loans are paid in monthly installments.
What happens if a borrower defaults on a promissory note?
With a secured promissory note, a lender can take possession of the collateral used to secure the loan. With an unsecured note, a lender can sue for payment and potentially garnish your wages.
Bottom line
A promissory note is a written promise to repay a loan. It lists important information about the terms of the loan, such as the name of the lender, the amount you are borrowing, the interest rate and the loan’s maturity date. With a home loan, you’ll have to sign both a promissory note and a mortgage or deed of trust, which secures the loan with the property you’re buying.
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Consumer Financial Protection Bureau, “What Documents Should I Receive Before Closing on a Mortgage Loan?” Accessed Nov. 13, 2025.
