Promissory Note UK: Interest & Instalment Terms Guide

Overview

A promissory note is a written, signed promise by one person (the maker) to pay a defined sum of money to another person (the payee), either on a fixed date or across a series of instalments. Unlike a full loan agreement, it is typically a one-sided instrument: the maker makes the promise, and the payee holds the note as evidence of the debt.

When interest is added, the note sets out the rate and how interest is calculated on the outstanding balance. When instalments are added, it breaks the repayment into regular, manageable amounts rather than a single lump sum. In English law, a promissory note is recognised under the Bills of Exchange Act 1882 and can be enforced as a debt if the maker defaults.

For private lending between individuals, it is often used alongside, or instead of, a longer loan agreement because it is quicker to draft and easier to understand. That said, if the amount is significant or the relationship is complex, a fuller loan contract may be more appropriate.

Key steps

1. Identify the parties properly. Write out the full legal names and current addresses of both the maker (the borrower) and the payee (the lender). Avoid nicknames or shortened versions. If either party moves, the note should still be enforceable, but accurate details at the start reduce arguments later about who exactly signed up to what.
2. Set out the principal and the interest rate. State the exact sum being lent in pounds sterling, and the interest rate as an annual percentage. Make clear whether interest is simple (calculated only on the original principal) or compound (calculated on principal plus accrued interest). Also state when interest starts to run, usually from the date the money is advanced.
3. Build the instalment schedule. Decide how often payments will be made, weekly, monthly, or quarterly, and the amount of each instalment. A schedule attached to the note showing the breakdown of principal and interest for each payment can prevent confusion later. If there is a final larger payment (a balloon), spell that out separately so nobody is surprised when it falls due.
4. Address late payment and default. Include what happens if an instalment is missed. Common approaches are a higher interest rate on overdue amounts, a grace period before default is triggered, and a clause allowing the lender to call in the whole outstanding balance if payments stop. Note that penalty clauses which go beyond a genuine pre-estimate of loss can be unenforceable, so the drafting here matters.
5. Sign, date, and keep originals safe. Both parties should sign and date the note, ideally with a witness for each signature. The payee usually keeps the original, and the maker keeps a copy. Store it somewhere safe, because if enforcement is ever needed, the original document is often what a court will want to see.

Common questions