Legal Definitions - note payable

A note payable is a formal, written promise by one party (the borrower) to pay a specific sum of money to another party (the lender) on a future date or in a series of installments. This promise is typically documented in a legal instrument called a promissory note, which outlines the principal amount, interest rate, repayment schedule, and other terms. Unlike an informal "account payable" (which is usually for goods or services received on credit), a note payable is a more structured debt, often involving a formal loan agreement and interest payments. For the party owing the money, it represents a liability on their financial records.

• Example 1 (Business Loan from a Bank): A small graphic design studio needs to upgrade its computer equipment and software. It secures a loan of $25,000 from a commercial bank, agreeing to repay the amount over three years with a 5% annual interest rate. The studio signs a promissory note detailing these terms.

  Explanation: The promissory note signed by the graphic design studio is a note payable because it's a formal, written commitment to repay a specific sum of money ($25,000 plus interest) to the bank over a defined period. For the studio, this represents a structured liability that must be settled according to the agreed-upon terms.

• Example 2 (Personal Loan for a Major Purchase): Emily wants to buy a new refrigerator and stove for her kitchen, totaling $4,000. Her parents agree to lend her the money, and they all sign a simple written agreement stating that Emily will pay them back $150 each month for 27 months, with no interest charged.

  Explanation: This written agreement between Emily and her parents constitutes a note payable for Emily. It's a formal, documented promise to repay a specific amount ($4,000) in installments over a set period. Even without interest, the formal nature and clear repayment schedule make it a note payable rather than just an informal personal debt.

• Example 3 (Financing an Asset Purchase from a Seller): A landscaping company decides to purchase a new commercial-grade lawnmower directly from the equipment dealer. Instead of paying the full $15,000 upfront, the dealer offers financing. The landscaping company signs an agreement to pay $500 per month for 36 months, which includes an interest charge.

  Explanation: The agreement signed by the landscaping company to finance the lawnmower purchase is a note payable. It's a formal, written obligation to pay a specific sum (the purchase price plus interest) to the equipment dealer over a defined period, making it a structured liability for the company.