A promissory note is a written promise, signed by the borrower, to pay a set amount of money to another person, either on demand or by a set date. The borrower is called the maker. Under Article 3 of the Uniform Commercial Code (section 3-104), a note is negotiable when it is an unconditional promise to pay a fixed amount, with or without interest, payable to bearer or to order, on demand or at a definite time, with no other undertaking. Article 3 then governs how it is transferred and collected.
What is a promissory note?
A promissory note is a document in which one person promises in writing to pay money to another. It names the amount, who is paying, who is being paid and when payment is due. It may also set interest, a payment schedule and what happens on default.
The Uniform Commercial Code, the model law for commercial transactions that states adopt, defines the pieces. Under UCC 3-103, a "promise" is "a written undertaking to pay money signed by the person undertaking to pay." The person who signs it is the "maker." Under UCC 3-104(e), an instrument "is a 'note' if it is a promise and is a 'draft' if it is an order."
Is an IOU a promissory note?
Not on its own. UCC 3-103 says "an acknowledgment of an obligation by the obligor is not a promise unless the obligor also undertakes to pay the obligation." A note that says "I owe you $500" records a debt. A note that says "I promise to pay you $500 by June 1" is a promise to pay.
What makes a promissory note negotiable?
UCC 3-104(a) defines a negotiable instrument as "an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order," if it:
- Is payable to bearer or to order when it is issued or first comes into possession of a holder
- Is payable on demand or at a definite time
- States no other undertaking or instruction to do any act beyond paying money, with some exceptions, for example about collateral
Under 3-104(d), a promise is not an instrument if, when issued, it carries a conspicuous statement that it is not negotiable or not governed by Article 3.
Negotiability matters mostly when a note changes hands. Article 3 sets the rules for transferring and collecting negotiable instruments. A note that isn't negotiable can still be a binding contract. It just isn't governed by Article 3.
How is a promissory note different from a payment plan agreement?
| Promissory note | Payment plan agreement | |
|---|---|---|
| Main purpose | A promise to repay money | Terms for paying a price over time |
| Usually covers | Amount, interest, due dates, default | Price, deposit, schedule, methods, fees, cancellation |
| Governed by | UCC Article 3, if negotiable | Contract law and consumer credit rules |
A payment plan agreement can include a promise to pay, and some businesses ask customers to sign a separate note. Whichever you use, consumer credit rules may apply. A business that regularly extends consumer credit with a finance charge, or payable by written agreement in more than four installments (not counting a down payment), is a creditor under the Truth in Lending Act.
What does a promissory note usually include?
- The amount, and the interest rate if any
- The payment schedule, or "on demand"
- The names of the maker and the payee
- What counts as a default, and what happens then
- The maker's signature and the date
State law governs the details, and states adopt the UCC with their own changes.
General information, not legal advice.
- Cornell LII: UCC 3-104, Negotiable instrument
- Cornell LII: UCC 3-103, Definitions
- CFPB: Regulation Z, 12 CFR 1026.2, Definitions
Every figure on this page was checked against these sources on Oct 6, 2026. General information, not legal or tax advice.