Legal Question in Credit and Debt Law in India

14.05.2014

Dear Sir / Madam,

Definition

A promissory note is legal contract, often for very large sums of money. Default on payment of a promissory note can lead to legal action up to and including losing your home. Because of the serious consequences involved, it is important to both parties that the promissory note is valid

Form

To be valid and enforceable, a promissory note must be a written contract. A verbal agreement to borrow and repay money is not a valid note. Lenders use standard promissory note forms written according to the law of the state where the lender operates. Each note is largely the same except for the amount and terms, which are tailored to the individual deal.

Monetary

A promissory note is only valid if it is for a monetary transaction. The lender agrees to give money to a borrower, who promises to repay it. A promissory note can�t be for the transfer of accounts, real estate or any other assets. While the borrower may offer assets as part of the loan, those assets are secured using other documents, such as a mortgage, assignment or security agreement. The promissory note will reference these other documents, but is only valid if it is for the transfer of money.

Terms

A valid promissory note must list the terms and conditions of the loan. In addition to the loan amount, it must state the interest rate, payment amount, payment frequency and the maturity date of the loan. If the note does not contain the terms of repayment, the lender can�t enforce non-payment. For example, if a note calls for monthly payments, the lender can exercise its rights to collect once it goes past a month of non-payment. However, if the note matures in five years and includes no payment schedule, the lender can�t enforce non-payment until after the loan matures.

Regards,