What Is the Difference Between a Promissory Note & a Bill of Exchange?

Legal documentation may be necessary when certain debts or deals are negotiated to ensure each party is protected. A promissory note and a bill of exchange, though similar, are two legal documents used in distinct circumstances. Whether choosing to sign a promissory note or a bill of exchange, ensure that the person you are entering the deal with is credible, and you are able to verify the authenticity of the document and the person drafting it.

Promissory Note Definition

According to the U.S. Securities and Exchange Commission, a promissory note is considered a form of debt and sometimes companies may use it to raise money for their business. A promissory note should be used to outline any terms and conditions of the loan that is being granted. A promissory note also lists the repayment schedule of the debt. For example, your payments may be equal payments for several years, or they can be amortized, which means that each payment includes a portion of funds to go towards the interest and the principle of the debt.

Bill of Exchange Definition

A bill of exchange, also known as a draft, is similar to writing a check or a loan, but it does not require an interest rate. The bill of exchange or draft is typically written by one person/company to pay someone else a specific amount of money on a certain date in the future. The bill of exchange can also be drawn from a bank.

Uses for a Promissory Note and Bill of Exchange

Promissory notes are used when applying for financial aid for college, or purchasing a vehicle or home. Based on the definition of a promissory note, the interest rate must be set in addition to the loan. A promissory note can also be drafted between two individual parties. A bill of exchange is primarily used in international trade, import and exporting. Banks can also draft a bill of exchange, also known as a bank draft. An exporter may want to send goods to another country and need a legal document from the bank, promising they would get the amount of money necessary after delivery.

Differences

A promissory note allows payments to be made over a predetermined amount of time, typically in monthly payments. A bill of exchange is a promise to pay a lump sum amount of money at a future date, and typically does not include payment plans. Promissory notes include interest rates, whereas bill exchanges do not. A promissory note is a promise to pay a debt, and a bill of exchange is an order pay a debt. A promissory note only includes two parties: the person drafting the promissory note and the person who must pay. The bill of exchange includes three parties: the person drafting the bill of exchange, the person or entity receiving the bill of exchange (such as the bank) and the person paying the bill of exchange.

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