• Money
    • Budget
    • Shop
    • Travel
    • Stories
  • Career
    • Advice
    • Entrepreneurship
    • Freelance
    • Small Business
  • Investing
    • General
    • IRA + 401K
    • Stocks + Bonds
    • Retirement Planning
    • Estate
  • The Basics
    • Student Loans
    • Credit Cards
    • Debt
    • Taxes
    • More
  1. Home
  2. The Basics
  3. Real Estate
  4. Is a Letter of Credit a Promissory Note?

Is a Letter of Credit a Promissory Note?

By: Ann Johnson
  • Share
  • Share on Facebook

The letter of credit and the promissory note typically give the same promise - the promise of funds. While each is a written instrument commonly used in financial transactions, each serves a different function. In essence, the letter of credit promises something the issuer already has, while the promissory note promises to give something in the future that the issuer may not yet have.

History of the Letter of Credit

Around the 14th century, European bankers devised a way of transporting money, known as the letter of credit, which might be the precursor to the credit card. Instead of a plastic card, the letter of credit was an actual letter, written by the bank on behalf of a customer, stating the amount of credit the holder of the letter had with the financial institution. A person could use the letter of credit to make a purchase because funds promised by way of the letter of credit were funds the holder of the letter already had approval to use.

Letter of Credit Today

While credit cards provided a new way to transport funds, they did not replace the letter of credit. International business transactions involving large sums of money often rely on the letter of credit as the funding instrument. The process for redeeming the funds may vary but typically require documentation or receipt of goods or services.

Video of the Day

Promissory Note

While the letter of credit promises funds that the holder has access to, the promissory note is basically an IOU. It is the personal promise from the borrower to repay a loan. By issuing a promissory note, the borrower exposes his assets to the lender. A promissory note is transferable, in that a lender who receives the note can sign it over to a third party.

Promissory Note Function

A mortgage is a lien on property held by the lender or mortgagee. When establishing a mortgage, the borrower first issues a promissory note to the lender pledging the real property as collateral should the borrower default. The promissory note is the instrument used to convey the borrower's promise, while the mortgage is the instrument used to enforce the promise.

Receiver

An important distinction between a promissory note and a letter of credit is how it applies to the receiver. The receiver of the promissory note typically supplies funds for a purchase. The receiver of the letter of credit is not the party supplying funds for a purchase, but the party receiving the funds.

Show Comments

Related Articles

Is a Fee Simple Title As Good As a Warranty Deed?

Is a Fee Simple Title As Good As a Warranty Deed?

The Basics
Home Ownership
By: Erika Johansen
What Is a 90-Day Loan Note With a Bank?

What Is a 90-Day Loan Note With a Bank?

The Basics
Personal Loans
By: Josh Victor

PARTNER CONTENT

They Paid Off $218K of Debt—Without Windfalls or Six-Figure Salaries

They Paid Off $218K of Debt—Without Windfalls or Six-Figure Salaries

Example of a Promissory Note

Example of a Promissory Note

The Basics
Personal Loans
By: Tara Thomas
Is a HELOC a Promissory Note?

Is a HELOC a Promissory Note?

The Basics
Home Ownership
By: Carl Carabelli
What Is the Difference Between a Bank Note & Currency?

What Is the Difference Between a Bank Note & Currency?

The Basics
Saving
By: Madison Garcia

Get Weekly Savings& Finance Tips.

  • Money
  • Career
  • Investing
  • The Basics
  • About
  • Contact Us
  • Terms
  • Privacy Policy
  • Copyright Policy
© 2019 Leaf Group Ltd. Leaf Group Media

Get Weekly Savings
& Finance Tips.

Money Made Easier.

Please enter a valid email.