A bank is a financial institution that facilitates financial transactions, including deposits, loans and the issuance of bank notes. Promissory notes are a standard component of everyday banking. The issuance of bank notes are actually issuance of promissory notes. When looking at borrowing from a bank, a promissory note will probably be part of the transaction, though the bank may not always accept a promissory note issued to you for monies owed directly to you.
A promissory note is similar to an IOU, which states that one party owes money to the other. The note documents a loan, including the value lent and any interest charged on the amount borrowed. Promissory notes are considered negotiable assets. However, weight must be given to the party making the promise to pay since a promissory note doesn't create an order to pay nor an acknowledgment that funds have been paid.
Mortgage Promissory Notes
When you purchase a house and obtain a mortgage at the bank, you sign a promissory note along with your mortgage note. The promissory note is negotiable for the bank as cash where the mortgage note defines the repayment plan and loan provisions directly. The bank can take a $100,000 promissory note and exchange it for $100,000 treasury bonds earning interest with no financial risk to the bank for giving you the loan.
Personal Promissory Notes
Promissory notes made outside of commercial lending institutions tend not to be given the same weight as those in the commercial arena. If you loan your aunt $10,000 to buy a car and she gives you a promissory note, the bank may not feel comfortable allowing you to leverage the note. The bank is unable to determine if the note is fraudulent or not. In fact, the Securities and Exchange Commission warns investors about increasing issues with fraudulent promissory notes with high interest rates. Many Ponzi schemes have promissory notes as the foundation of getting assets.
Banks will consider all assets and debts when you apply for any loan. In the event of a foreclosure, one promissory note may be exchanged for a new promissory note as the debt is negotiated. Whether a bank will accept a promissory note for value is contingent on other factors, including credit history and assets to protect the bank should it need to collect on the note.