What is a Promise to Pay Agreement?

A promise to pay agreement is a promissory note. It details the amount of debt outstanding, the conditions under which the money will be repaid, the interest rate, and what will happen if the money is not repaid in a timely manner. One form of this agreement states a specific date by which the entire amount of the debt is to be paid off (commonly used for payday loans). Another form lays out a series of incremental payments over time, while a third version is an open-ended note, where the loan balance can go up or down over time.

When a Promise to Pay Agreement is Used

A promise to pay agreement is used when a customer has not paid an amount that was made available on trade credit, and the creditor now insists on a formal lending arrangement to improve the odds of repayment. This is an especially useful approach when the creditor mandates a personal guarantee by the owner; if the owner has substantial unencumbered personal assets, this greatly improves the odds of collection.

A promise to pay agreement may also be used with individuals, so that the seller has a preference debt that is senior to other sellers who have only extended trade credit to a person. Promise to pay agreements may be required for payday loans, car loans, and mortgages.