What is a Promissory Note under English law?
Section 83 of the Bills of Exchange Act 1882 defines a promissory note as an unconditional promise in writing, made by one person to another and signed by the maker, to pay a sum certain in money on demand or at a fixed or determinable future time, to a named person, to their order, or to the bearer.
In everyday terms, it is a short signed document in which the borrower promises to repay a set amount in pounds sterling to the lender. This page covers England and Wales. Scotland and Northern Ireland have their own rules on contracts and deeds, so check locally if either party is based there.
The promise must be unconditional. A note saying the borrower will repay only if a business succeeds, for example, is not a promissory note in the legal sense, even if it may still work as a contract.
When to use one
In England and Wales, promissory notes are most often used for straightforward private loans where both sides want the amount and the repayment terms in writing:
- Lending money to a family member or friend
- Helping a relative with a car, a deposit or another large purchase
- A director or shareholder lending money to their own company
- Turning money already owed into a clear repayment plan
- Short term loans between private individuals
Writing the loan down also helps if questions arise later, for example whether money was a loan or a gift when an estate is being dealt with. If the money goes towards a house deposit, the mortgage lender will usually need to be told that it is a loan.
What to include
Keep the note short and clear. A well drafted UK promissory note usually covers:
- The full names and addresses of the borrower and the lender
- The amount borrowed in pounds sterling, in words and figures
- Whether interest is charged and, if so, the annual rate and how it is calculated
- When repayment is due: on demand, on a fixed date, or in instalments on a clear schedule
- Whether the borrower may repay early without a penalty
- What counts as default, such as a missed instalment, and an acceleration clause making the whole balance due at once
- If there is more than one borrower, that they are jointly and severally liable
- The date, the borrower's signature and, ideally, a witness
Signing, witnesses and deeds
A promissory note must be signed by the borrower. The law does not require a witness for a simple note, but an independent adult witness, ideally someone who is not a party or a close relative, makes the signature much harder to dispute later.
A promise is generally enforceable as a contract only if the person receiving it gives something in return, known as consideration. Lending the money is usually enough. Where consideration may be in doubt, for example a promise to pay that is closer to a gift, it is safer to execute the note as a deed.
For an individual, executing a document as a deed means:
- It makes clear on its face that it is a deed, for example by stating that it is executed as a deed
- The borrower signs it in the presence of a witness, who also signs to attest the signature
- It is delivered, meaning the borrower intends to be bound by it, usually from the date shown
Deeds also give the lender more time to act. Under the Limitation Act 1980, a claim on a simple written promise must generally be brought within six years, while a claim on a deed generally has twelve.
Promissory note or loan agreement?
Both record a loan, but they work differently. A promissory note is a one sided promise signed by the borrower alone. A loan agreement is a contract signed by both parties that sets out obligations for each of them.
- A promissory note suits simple personal and family loans with a clear amount and repayment plan
- A loan agreement suits larger or more complex loans, with conditions, warranties, or duties on the lender such as paying out in stages
- A loan secured on a home or other assets needs separate security documents, such as a legal charge registered at HM Land Registry, alongside either one
If the deal needs conditions that would make the promise to pay conditional, use a loan agreement rather than a note.
Interest, records and getting advice
There is no general statutory cap on the interest rate a private individual may charge on a one off loan in England and Wales. The rate is whatever you agree, but keep it realistic: a court can step in where the terms or the relationship between lender and borrower are unfair.
Things change if you lend as a business. Providing consumer credit by way of business is a regulated activity, so lenders generally need authorisation from the Financial Conduct Authority (FCA) and must follow the consumer credit rules. A genuine one off loan to family or friends is normally outside this, but if you lend regularly or for profit, take advice first.
Keep good records. Each party should hold a signed copy of the note, the loan and every repayment should go by bank transfer rather than cash, and the lender should log any interest received, which is usually taxable income to report to HMRC.
See a solicitor if the loan is large, if it is secured on property, if a company is involved, if you are unsure whether consumer credit rules apply, or if the borrower has stopped paying and you are thinking about court action.