FAQ – Promissory note, IOU and private loan

TABLE OF CONTENTS

TABLE OF CONTENTS
Definitions
1. What is a promissory note?
2. What is an IOU?
3. What is the difference between a Promissory Note and an IOU note?
4. What types of promissory notes are there?
For who?
5. Who is the Borrower in a promissory note?
6. Who is the Lender in a promissory note?
7. Who can make a promissory note?
How to write your promissory note
8. Why do I need to write a promissory note?
9. Is it legal for me to charge interest on a loan? How much interest can I charge?
10. How do I write a promissory note?
12. Do I need a guarantor to the promissory note/IOU?
After writing your promissory note
13. As a Lender, what can I do in the event of a default on the promissory note?
14. Can I modify the promissory note after creating it?
15. How can I modify the promissory note after creating it?

What is a promissory note?

It is a written and signed unconditional promise to pay a certain sum of money to a specified party, either on demand or at a fixed time in the future. The statutory definition can be found in Section 92(1) Bills of Exchange Act (Cap 23).

What is an IOU?

An abbreviation of the spoken phrase “I owe you”, this is an informal written acknowledgement of a debt owed by one party to another. In addition to covering monetary debts, the IOU may also cover other products (eg: personal property).

What is the difference between a Promissory Note and an IOU note?

The main difference is in the extent of formality in both documents. Since the IOU note is a simpler, less formal instrument, it only states the amount that is to be returned by the borrower. On the contrary, in addition to stating the amount owed, the promissory note also instructs on the action required for repayment, and any liability and consequences that the borrower would be subject to in cases of default.

What types of promissory notes are there?

There are several types of promissory notes, including the following:

Secured Promissory Notes:

· These notes create an obligation for the borrower to give up personal property or real estate in the event of any default on the loan. It thus provides the Lender with a security interest as collateral for repayment.
· For example: The Lender agrees to loan the Borrower a sum of $150,000. The secured promissory note indicates that the Borrower will give up his car to the Lender if he fails to repay the sum within 6 months.

Unsecured Promissory Notes:

· These notes do not create any obligation for the borrower to give up any personal property or real estate in the event of default. It may, however, state the terms of the repayment.

Who is the Borrower in a promissory note?

The borrower is the party (either a natural person or a corporate entity) that receives value from the Lender provided that the Borrower will repay that value, with interest, to the Lender. This “value” may constitute money, products or some kind of service.

Who is the Lender in a promissory note?

The Lender is the party (either a natural person or a corporate entity) that gives some value to the Borrower provided that the Borrower will return that value, with interest, to the Lender.

Who can make a promissory note?

Any Lender or Borrower under the definitions above may create a promissory note.

Why do I need to write a promissory note?

Firstly, it should be noted that unlicensed money lending businesses are prohibited under the Moneylenders Act (Cap 188) in the jurisdiction of Singapore. Friendly loans (ie. personal loans between family, friends and other acquaintances) would not be considered unlicensed moneylending unless the Lender is engaged a sustained system of lending transactions, or had lent money to numerous parties freely and readily.

Hence, friendly loans between family and friends do not require a license. Such friendly loans may arise for many reasons, including the following:

  • Gathering of capital for the starting of a new business/enterprise, or other commercial purposes; or
  • Personal loans to buy real property (eg: houses, cars, etc.); or
  • Personal loans to pay of credit card payments and debts

Regardless of whether you are giving/receiving loans for commercial or other personal purposes, promissory notes serve to provide great certainty and peace of mind. This is because a well-executed promissory note has the full legal effect of binding both (or all) parties to it. As a borrower, it provides clarity on the terms of repayment, and assures the Lender that you are committed to repayment. It also clearly specifies the consequences you may face in the event of any default, late payment or other scenarios that may arise. As a Lender, they prevent you from being stuck in a helpless position in cases of default on the payment, providing an avenue of legal recourse.

One misconception is that promissory notes are irrelevant and unnecessary in the context of friendly loans (ie. between family and friends), and that they create an air of mistrust. On the contrary, promissory notes provide both parties an assurance that they intend deal with good faith and certainty – which in turn keeps friendly/familial relations intact.

Is it legal for me to charge interest on a loan? How much interest can I charge?

In Singapore, it is legal to charge interest on a friendly loan. So long as one can prove that he/she is not engaged in the business of unlicensed money lending (as explained above), he/she will not be caught within Section 3 of the Moneylenders Act as follows:

“Any person, other than an excluded moneylender, who lends a sum of money in consideration of a larger sum being repaid, shall be presumed, until the contrary is proven, to be a moneylender.”

As to the maximum interest that may be charged the Moneylenders Act and the Moneylenders Rules 2009 stipulate the maximum permissible interest rate for licensed moneylenders. However, since friendly loans do note require licensing (as explained above) and Lenders are not considered licensed moneylenders, the restrictions in the aforementioned statutes will not apply. As a precautionary measure against any legal complications, parties may draft an interest rate clause in the following form:

“I agree to be subject to an interest rate of (insert agreed upon interest rate) or the maximum allowed by law…”

How do I write a promissory note?

There are some standard features of a promissory note. The governing law and jurisdiction clause, the terms of repayment and interest chargeable are examples of some standard clauses in a promissory note. It is also important for both parties and one or two witnesses to sign the promissory note.

To customize your own promissory note and receive it instantly via email, click here.

How do I write an IOU?

Compared to a promissory note, an IOU is more informal in nature. It normally contains terms and a timeline for repayment. An IOU should also bear the parties’ and witness’ signatures.

To customize your own IOU and receive it instantly via email, click here.

Do I need a guarantor to the promissory note/IOU?

It is not compulsory to have a guarantor to the promissory note. However, if the Lender wishes to include one, a third party could be included in the promissory note to guarantee a loan in the event of the Borrower’s default. In order for this to be enforceable, the guarantee must be in writing (within the promissory note/IOU document itself) and signed by the guarantor.

As a Lender, what can I do in the event of a default on the promissory note?

In the event of a default, you will have several avenues of recourse.

SECURED LOAN

Firstly, if yours is a secured promissory note, the Lender will be able to acquire the security/collateral as agreed upon in the promissory note. For instance, if the Borrower takes a loan from the Lender using his car as security (and this is duly indicated within the promissory note), the Lender will be able to acquire possession of that car in the event of a default.

UNSECURED LOAN

However, even if yours is an unsecured promissory note (ie. no property has been offered as security/collateral), you will also have other avenues of recourse. One possibility is to engage a debt collection firm to recover the debt on your behalf. These firms provide tailored solutions, specially adapted to the circumstances of the default to aid in the collection of the amount owed. This may or may not include legal action (ie. litigation).

ENGAGE A LAWYER

Alternatively, you may also opt to engage a lawyer directly. The lawyer could then issue a letter of demand on the debtor to facilitate the repayment of debt within as short a timeframe as possible. If the letter of demand fails to achieve this, legal proceedings may be commenced against the defaulting Borrower.

This could take place in the form of mediation (which involves lower costs). Failing which, the lawyer would likely advise you to litigate. Especially where the debts are supported by concrete evidence (eg: a clearly drafted promissory note), summary or default judgments could be obtained – which avoids the higher costs and hassle of a full-blown trial.

(Note: The Small Claims Tribunal does not entertain claims regarding loan transactions – whether friendly or otherwise. Instead, its jurisdiction extends to the contract for the sale of goods or provision of services. Hence, Lenders would not be able to obtain recourse by going to the Small Claims Tribunal.)

At the end of the day, a promissory note ensures that there is evidence for the Lender to legitimately act upon the Borrower’s default and is thus an essential tool in play in the context of loan transactions.

Can I modify the promissory note after creating it?

Yes. If the Borrower is unable to repay the debt owed on the first agreed upon schedule, it may be advantageous for both parties to modify the promissory note. This prevents the Borrower from being in a situation where he has no choice but to default. This modification, however, may only be done with the agreement of both parties involved.

How can I modify the promissory note after creating it?

There are several steps that can be taken to modify the note:

1. Pick out the “problematic terms” which need to be modified. For instance, if the Borrower is facing trouble with repaying the debt according to the stipulated timeline, the term involving the repayment timeline may be identified as the “problematic term”.

2. Raise these “problematic terms” with the other party. Negotiate, and come to a compromise on what a more suitable replacement term may be. Oftentimes, default and late repayment are situations that both parties want to avoid. It is thus very possible to generate alternate terms that are favorable to all.

3. Modify the “problematic term” and include the date in which the change will go into effect. You may also include any additional payments, fines or fees that may be imposed as a result of the modifications.

4. Once both parties have reviewed, edited (if necessary) and agreed to the modified term, the modified promissory note may be signed and dated. It will henceforth be a legally enforceable agreement.

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