Negotiable Instrument

Negotiable Instrument summary:

• A negotiable instrument is a written and signed promise to pay a set amount of money. 

• The payment may be due on demand or at a definite time specified in the document

• CDs and personal checks are examples of negotiable instruments. 

Negotiable Instrument Definition and Meaning

A negotiable instrument is a legally enforceable document that includes a written and signed promise to pay. These written documents are typically transferable, which means the holder can use them as a cash equivalent. 

Negotiable instruments could be payable at a designated time specified in the document or could be payable on demand, and interest may or may not be charged. Common examples of negotiable instruments include personal checks and certificates of deposit (CDs).

​​Key Features of Negotiable Instruments

Negotiable instruments must contain certain types of information to be considered legally valid and enforceable. While the rules may vary slightly by state, negotiable instruments typically: 

• Are in writing and signed

• Contain an unconditional promise to pay or contain an unconditional order to pay a specific sum of money

• Are payable on demand or at a specific time in the future

• Are payable to a specific person/company or to the person holding the negotiable instrument

If the negotiable instrument requires someone else to pay (a drawee—usually a bank), then the drawee must be named or must be described with enough information so that it is clear who the drawee is.

When stating the sum of money to be paid, the negotiable instrument may also need to contain information about: 

• Any interest to be paid

• Payment in stated installments 

• Whether collection costs are included in the event attorneys' fees are necessary to collect the payment 

Negotiable Instrument: a Comprehensive Breakdown

Negotiable instruments have a few main benefits: 

• They're an easy way to transfer funds without a lot of paperwork. Some negotiable instruments are valid internationally. 

• They allow for the instant transfer of funds. 

• They can be flexible because there are few limits on how often they can change hands. 

Negotiable instruments also have some drawbacks: 

• There is a risk of theft or loss since they’re physical documents. 

• There is the risk of fraud or forgery.

• It may take several days to access funds from negotiable instruments. For example, most checks take a few days to clear your bank account after deposit.

Real-Life Examples of Negotiable Instruments 

There are many real-life examples of negotiable instruments that people use every day. Some common examples you may have encountered include:

• Checks from your bank

• Money orders

• Traveler's checks

• Certificates of deposit

• Promissory notes

• Bills of exchange

• Bearer bonds

Each of these common financial documents meets the criteria needed to be classified as a negotiable instrument.