What is a Promissory Note and How Does it Work?

By Matt Frankel | Updated March 29, 2026
reading time 4 min read
Middle age woman looking at paperwork about promissory note

Key takeaways:

  • A promissory note is a legal document that outlines the terms of a loan, including repayment agreements, fees, and more, and obligates both the borrower and lender to abide by those terms.
  • The note can include specific details such as the borrower and lender’s identities, the loan amount, interest rate, repayment terms, maturity date, and collateral (if any).
  • There are two main categories of promissory notes: secured (with collateral) and unsecured (without collateral). Promissory notes are different from IOUs and are legally enforceable documents.

A promissory note is a legal document that includes extensive and specific details about a loan’s terms. Both the lender and the borrower sign a promissory note before a loan is funded, and doing so obligates both parties to abide by the terms—including repayment agreements, fees, and more.

Promissory notes establish the relationship between the borrower and lender (also known as the payor and payee), and clearly defines how much money is being borrowed and details of the expected repayment. 

What items are included in a promissory note?

This isn’t an exhaustive list, as promissory notes can be rather lengthy, but some of the common items you’re likely to find on a promissory note form include:

  • Clear definition of the borrower and lender. A promissory note names the lender and borrower(s), which can be individuals, corporations, or other entities. A promissory note may be negotiable, meaning that the debt obligation can be sold or transferred to another lender. For example, if you’ve ever bought a car or house, and the company you send your payment to changes, that’s likely what happened.
  • Total amount to be borrowed. This can include the loan principal plus any other fees that are rolled into the loan.
  • Interest rate. Details of the interest rate and how often it is computed.  
  • Repayment terms. A promissory note makes clear how much the borrower needs to repay at a time, at what interval the payments are to occur (typically monthly), and the total number of payments. Promissory note repayment terms also may contain a specific method of loan payment, such as automatic bank drafts, as well as what constitutes a default by the borrower.
  • Loan maturity date. The promissory note makes clear when the borrower will have fulfilled their repayment obligations.
  • Collateral. This doesn’t apply to all loans, but if there is collateral to be pledged as part of the loan, it will be stated in the promissory note. For example, if you get an auto loan, the specific details of the vehicle you’re buying will be included.
  •  Important dates. A promissory note will contain the date of loan issuance, as well as several other important dates.

Types of promissory notes

There are several different subtypes of promissory notes, but 2 main categories are secured and unsecured.

Secured promissory note: If there is collateral being pledged as a condition of the loan, a secured promissory note is used. The biggest distinction is that a secured promissory note clearly states the collateral being pledged, as well as what happens with the collateral if the borrower defaults on the loan. A real estate promissory note is an example of this, as it makes clear that the home can be foreclosed upon if the loan isn’t repaid.

Unsecured promissory note: Unsecured promissory notes are a promise to repay a loan, but without any specific collateral being pledged. Unsecured promissory notes are legally enforceable, and while the lender cannot seize assets immediately upon default, there are usually details about what will happen if the loan isn’t repaid.

Promissory note vs. IOU

An IOU—an acronym for “I owe you”—is a document that acknowledges a debt exists as well as its amount, but it doesn’t contain nearly as much detail as a promissory note, especially when it comes to repayment terms and legal requirements. In a nutshell, a promissory note is a far more enforceable legal document than a simple IOU. 

Do all loans have promissory notes?

Technically, any individual, business, or agency lending money can issue a promissory note. If you loan a friend money, you can draft a legally binding promissory note outlining the terms of the agreement. There are plenty of promissory note templates and promissory note examples available online that you can use for this purpose. 

Some types of loans don’t have promissory notes, especially those that don’t have a set amount of money to be borrowed or a set monthly payment amount. Credit cards are the main example, as you’ll typically have a document known as a cardholder agreement that lists details of the relationship. This is a different type of document than a promissory note, but it is important to realize it is still a legally enforceable document.

Other types of loans have promissory notes in addition to other legal documents. A mortgage is a good example, as it also has a legally binding mortgage contract that gives the lender a security interest in your home.

A loan agreement is similar to a promissory note, and is often used by financial institutions, especially in cases where large amounts of money are involved. Loan agreements are lengthier documents that contain more through definitions and provisions than a promissory note.

The bottom line on promissory notes

A promissory note is a legal promise from a borrower to a lender to repay money in a specific timeframe and at specific intervals. Even if you’re lending money to a friend, a promissory note is more formal than a simple IOU and can help set clearly defined repayment terms. Plus, promissory note enforceability can give you legal recourse if the money isn’t repaid as agreed. And if you’re a borrower, a promissory note gives you the clear details of when you’re expected to repay money, and how you’re expected to make your payments.

*This content is general in nature and provided for informational purposes only. This content is not specific to Upstart, except where explicitly stated. This content may contain references to products and services offered through Upstart’s credit marketplace. Upstart is not a financial advisor and does not offer financial planning services.

About the Author

Matt Frankel

Matt Frankel is a Certified Financial Planner® whose mission is to create a more financially informed world. Matt has had more than 10,000 published articles throughout his career, and won a 2017 SABEW Best in Business award for his coverage of the tax reform legislation. His work has been featured in The Motley Fool, CNBC, MSNBC, Nasdaq, USA Today, and many other outlets. He can regularly be seen on Motley Fool Live, and he has made guest appearances on NPR, BBC, Cheddar News, just to name a few. Matt is based in the Columbia, South Carolina, area where he lives with his wife Kathy, two amazing kids, and two high-maintenance dogs.

More resources you may be interested in

Secured vs. Unsecured Loans: Which Is Right for You?
Should You Take Out a Personal Loan If You Have Good Credit?
Personal Lines of Credit: Should or Shouldn’t You?

See if Upstart is right for you

Check your rate lock Won't affect your credit score¹

Upstart Network, Inc. (NMLS #936133) is not a lender. All loans on its marketplace are made by regulated financial institutions.

All mortgage lending is conducted by Upstart Mortgage, LLC dba Upstart Home Lending. (NMLS #2443873). Equal Housing Opportunity.

  1. Checking your rate won’t affect your credit score: When you check your rate, we check your credit report. This initial (soft) inquiry will not affect your credit score. If you accept your rate and proceed with your application, we do another (hard) credit inquiry that will impact your credit score. If you take out a loan, repayment information may be reported to the credit bureaus.
  2. Upstart’s model considers education: Neither Upstart nor its lending partners have a minimum educational attainment requirement in order to be eligible for a loan.
  3. 41% more approvals and 33% lower rates than a traditional model: As of publication in April 2026, and based on a comparison between the Upstart model and a hypothetical traditional model using Upstart data from Jan – Dec 2025. For more information on the methodology behind this study, please see Upstart’s Annual Access to Credit results here.
  4. Unsecured Loans: While most loans through Upstart are unsecured, certain lenders may place a lien on other accounts you hold with the same institution. There may be an option to secure your personal loan through Upstart with your vehicle, which will require a lien to be placed on the vehicle. It is important to review your promissory note for these details before accepting your loan.
  5. Loan amounts from $1,000 -$75,000: Your loan amount will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will qualify for the full amount. Minimum loan amounts vary by state: GA ($3,100), HI ($1,500), MA ($7,000). Maximum loan amounts may vary by state.
  6. Closing and funding timeline: In April 2026, 10% of funded HELOCs achieved a closing timeline of 2 days or less and a funding timeline of 7 days or less. This timeline assumes consumers close with our remote online notary, provide supporting documentation promptly, and ensure the information provided is accurate and consistent with our verification process. Delays, discrepancies, and other unforeseen factors may impact the closing timeline. MBA’s 2025 Home Lending Study reports an average industry closing time of 37 days.
  7. APRs from 6.2% – 35.99%, with 3 or 5 year terms: The full range of available rates varies by state. The lowest rates are only available to the most qualified applicants. A representative example of payment terms for an unsecured Personal Loan is as follows: a borrower receives a loan of $10,000 for a term of 60 months, with an interest rate of 17.50% and a 7.25% origination fee of $725, for an APR of 21.23%. In this example, the borrower will receive $9275 and will make 60 monthly payments of $252. APR is calculated based on 5-year rates offered in March 2026. There is no downpayment and no prepayment penalty. Your APR will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will be approved.
  8. Instant deposits: To receive instant funding, your bank account must support instant transfers. If your account does not support instant transfers, funds will be available to you depending on your bank’s transaction processing time and policies.
  9. Always On Commitment: We are committed to maintaining your credit limit as long as you continue to meet program eligibility and account requirements. To ensure the safety and security of all our members, we reserve the right to adjust or close lines in specific circumstances, including account default or late payments, suspected fraud, violation of our terms of service (including abusive behavior), or when necessitated by legal or regulatory requirements.
  10. Cash Line draws: You may request a draw at any time. Only one draw may be outstanding at a time; after it is fully repaid, you may request another.
  11. HELOC APRs as low as 6.52%: Terms shown here are subject to change without notice. APRs for initial advances range from 6.52% to 18.00% based on rates offered as of April 2026. The lowest rate is only available to consumers willing to become a member of a credit union and to those who meet a minimum FICO score of 780, CLTV under 70%, and DTI under 45%. Your actual rate will depend on many factors such as your credit history, combined loan-to-value ratio (CLTV), line amount, loan term, lien position, and property state. Origination fee to open an account is between 0% and 4.99% of the approved credit limit. The Annual Percentage Rate (“APR”) is variable and based on the Prime Rate as published in the Wall Street Journal “Money Rates” table plus or minus a margin. Your APR will never be less than 3.99% or greater than 18.00%. Property insurance is required.
  12. No annual fee, prepayment penalty, or fees to redraw: Terms shown here are subject to change without notice. Origination fee to open an account is between 0% and 4.99% of the approved credit limit. The Annual Percentage Rate (“APR”) is variable and based on the Prime Rate as published in the Wall Street Journal “Money Rates” table plus or minus a margin. Your APR will never be less than 3.99% or greater than 18.00%. Property insurance is required.
  13. 2,500+ Variables:As of 3/31/2026. “Variables,” often also referred to as “features,” refers to raw variables and combined variables considered in our AI models. A “raw” variable is a non-combined, conceptually distinct unit of data, such as “applicant-reported savings.” A “combined” variable is data that has been transformed, combined, or otherwise engineered from a raw variable or set of raw variables, such as “applicant-reported savings” divided by “loan amount.
  14. Fully automated loans: In Q2 2026. Percentage of Loans Fully Automated, which is defined as the total number of loans in a given period originated end-to-end (from initial rate request to final funding for personal loans and small dollar loans, and from initial rate request to signing of the loan agreement for auto loans) with no human involvement required by the Company divided by the Transaction Volume, Number of Loans in the same period.