What Is the Difference Between a Promissory Note & a Forgivable Loan?

About Promissory Notes

Businesses use promissory notes when they need money. They are much like business loans. Promissory notes can be secured with some type of property or tangible asset, or they can be unsecured. Individuals may also use a promissory note when lending money to friends or family. The lender, often referred to as the holder, payee or obligee of the note, and the borrower can negotiate to make the note payable at a specific future date -- or on demand. When a note is payable on demand, the borrower must pay off the note when the holder demands payment.

Promissory Note Terms

A typical promissory note includes the principal and interest rate, as well as the repayment terms of the note. Paying the note off in full plus interest is a common form of repayment for promissory notes. Another common form of repayment is when the borrower makes payments to the lender in regular installments until the note is paid in full. The borrower and the lender of the note can negotiate the repayment terms of the note.

About Forgivable Loans

When an employer offers an employee or potential employee a forgivable loan, it means the employer loans the employee a set amount of money as a condition of her employment. If the employee does not meet the conditions of the forgivable loan, she has to pay back the principal plus interest on the loan. If she fulfills the conditions of the loan, the employer forgives the loan. This includes the principal plus any accrued interest.

Forgivable Loan Terms

A common condition of a forgivable loan is that the employee must agree to work for the company for a specific period of time to qualify for loan forgiveness. If the employee quits before the required amount of time has passed, he is required to pay the loan back to his employer. This includes principal and interest. Additionally, the employee must typically claim a certain amount of the loan as income every year. For instance, an employee receives a $10,000 loan on his first day of employment, but his employer requires that he work for the company for 5 years before his loan qualifies for forgiveness. This means he must claim $2,000 per year for 5 years as income on his federal and state tax returns.