Difference Between a Promissory Note & a Loan Agreement


If you don’t know the process of borrowing money, then things will get complicated. You should know the difference between a promissory note and loan agreement. Promissory note is used to promise the repayment of a lump sum amount, whereas in loan agreement, the amount has to be paid back in installments. If you know the difference between a promissory note and loan agreement, then you choose the one according to your requirements. Both of these documents are associated with the borrowing of money. Both the documents insist that whatever be the amount, it has to be paid back.

Loan agreement contains detailed information of borrowed amount, repayment period and repayment method. A major difference between the promissory note and loan agreement is signature. A loan agreement has to be signed by both the lender and borrower to acknowledge that both of them understand the specifications about the loan. In a promissory note, only borrower has to sign and the promissory note contains only fewer details when compared to the loan agreement. Both the documents are legally valid. In both cases, the lender has the right to recover the monetary damages occurred with the help of the court, if the debtor fails to follow the terms in these documents.

Using a promissory note or loan agreement is completely a personal decision. Each of the documents has its own advantages and disadvantages. A promissory note is used to handle a loan or sale of product that can be paid in future as lump sum amount. A loan agreement is used in a complicated arrangement in which compound interest is involved and installments of payment are due. Both agreements show the period of time for repayment for the loan taken by the borrower without fail. The terms and conditions included in both the documents have to be followed properly by the borrower and lender.

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