Promissory notes – clear terms for loans and repayment

What is a promissory note?

A promissory note is a written undertaking to pay a debt. The person entitled to payment is the creditor, and the person required to pay is the debtor.

The document provides evidence of the debt and reduces the risk of disagreements about the amount, interest and repayment. It can be used for loans between individuals, within a family or between a company and one of its shareholders.

A promissory note does not automatically give the lender security over particular property. Any pledge, personal guarantee or other security must be arranged separately.

Non-negotiable and negotiable promissory notes

Swedish law distinguishes principally between simple, or non-negotiable, promissory notes and negotiable promissory notes.

A non-negotiable promissory note is payable to a specified person. It is commonly used for private loans and other arrangements in which the lender and borrower know one another. The claim can be assigned, but the debtor should be notified so that they know who is entitled to receive payment.

A negotiable promissory note is payable to the bearer or to a specified person or order. It is intended to be easier to transfer. In certain circumstances, a new holder acting in good faith may acquire stronger rights against the debtor than the previous creditor had.

A non-negotiable promissory note is usually the more suitable option for an ordinary private loan.

What should the promissory note contain?

The terms should reflect the loan and the parties’ circumstances. The document should normally state:

• the identity of the creditor and debtor
• the principal amount
• when and how the money is advanced
• the repayment date
• whether repayment is made in one payment or by instalments
• whether interest applies and how it is calculated
• the default interest payable following late payment
• whether the debtor may repay the loan early
• what happens if the debtor does not follow the payment schedule
• whether the loan is secured by a pledge, guarantee or other security.

If several people sign the same promissory note as debtors, they may become jointly and severally liable unless the document provides for divided liability. The lender may then demand the entire debt from any one of them.

If the parties do not specify a due date, the general rule is that the debt becomes payable when the creditor demands payment. Clear due dates and repayment terms help both parties understand their obligations.

When is a promissory note useful?

Promissory notes are commonly used for loans between relatives, friends or cohabiting partners. They may also be needed when two people contribute different amounts toward the down payment on a shared home or when a shareholder lends money to a company.

Where cohabiting partners make unequal contributions to a home, the promissory note may need to be combined with a cohabitation agreement. The promissory note records the debt, while the cohabitation agreement governs how the home will be treated following separation.

Written documentation is particularly valuable when the loan is substantial or will be repaid over a long period.