Promissory Note

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Updated May 11, 2023
~ 6 pages
A promissory note is a written promise to pay a specific amount within a specific timeframe. Both parties must sign this document to guarantee the borrower will repay the lender on that date. Tailor this promissory note form to your situation and download it in PDF within minutes.

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Paper titled "Promissory Note"; man and woman shaking hands at the desk

Promissory notes are written promises to pay a specific amount within a specific timeframe. Both parties must sign this document to guarantee the borrower will repay the lender on that date.

Promissory notes are different from contracts. Contracts contain all the details of legal agreements. Promissory notes cover only the following:

  • Payment due date;
  • Payment method; and
  • Amounts owed.

Any financial institution can use promissory notes. In the past, you likely signed one when you took out a loan.

Other terms for a promissory note are:

  • Demand note;
  • Commercial paper;
  • Loan agreement;
  • Notes payable; or
  • IOU.

Whether between individuals or between entities, a promissory note records a loan. Promissory notes ensure clarity about due dates for payments and payment amounts by putting all relevant details in writing.

What Is a Promissory Note?

Promises to pay back money owed are promissory notes. Upon signing the note, the borrower receives the funds and agrees to make payments according to the terms. The lender will lend the money at an interest rate.

Types of Promissory Notes

Secured Promissory Note

The lender may take possession of the borrower’s property if the borrower fails to repay the amount for something such as a vehicle or a home within the timeframe denoted.

Unsecured Promissory Note

If the borrower does not repay the loan, the lender must file a claim in small claims court or take other legal steps.

Demand Promissory Note

Demand promissory notes require a lender to demand full payment before receiving any funds. They are known as demand promissory notes. A borrower who receives a demand promissory note doesn’t have to pay anything until the lender informs the borrower the amount is due.

Tax benefits of promissory notes

The income generated from a promissory note is generally taxable and has to be reported. It is simply the interest you earned on the note during the tax year. You should file your income tax return if you lent the money personally rather than through your business.

Promissory note vs. loan agreement

A loan agreement or promissory note is a legally binding document that sets out the terms for debt repayment. In contrast, a loan agreement typically contains more specific and stringent terms, with greater obligations and restrictions placed upon the borrower. There are also often elements of security in it (e.g., putting up a house), while a promissory is usually unsecured.

The promissory note should suffice in most cases if there is a relatively small amount of money involved and there is a great deal of trust between the lender and the borrower. A loan agreement, however, is more appropriate if there is a significant debt involved and the two parties are not very familiar with each other.

When both parties are businesses or individuals, a loan agreement is appropriate. If both parties are individuals (such as friends or family members), a promissory note is appropriate.

Why Is a Promissory Note Important?

Whether you are borrowing money or lending it, you can use this simple promissory note template to guarantee repayment of all debts. Since you have documented the transaction and set out repayment terms, you can feel protected and assured if you create a legally binding promissory note.

You can use this promissory note to outline all the specific terms regarding the repayment, including who is involved, when it is due, and whether there’s interest. 

What Are Promissory Notes Used For?

Promissory notes are useful when:

  • A business transaction results in someone or an organization owing money.
  • If you need to repay a sum of money (a debt), you must create a legally enforceable contract.
  • There is an organization that owes money to you.
  • Payments begin and end at fixed dates, and the repayment amount is certain.

A promissory note will ensure that the debtor will repay. It is legally binding on the party owing the money and records the transaction.

What Should Include in the Promissory Note?

Promissory notes should include the following information:

  1. Parties to the note;
  2. Repayment amount (debt);
  3. Repayment deadline;
  4. The amount of interest due and whether it is payable; and
  5. Contractual terms and conditions for loans.

How To Write a Promissory Note

You do not need to spend much time preparing a promissory note, but you must be very careful when completing it. If you need to consult a local lawyer and check county and state requirements, you can use our simple promissory note sample to create a legal document that is as comprehensive as possible.

Coordinate With the Counterpart

  • Amount ($) –– This is the amount of money borrowed.
  • Interest Rate –– There are laws in every state regarding interest rates (or “usury rates”). All states have a maximum amount a lender can charge.
  • Late Fee(s) –– Penalties that will apply if payment is late.
  • Security –– Lenders may accrue vehicles and second mortgages if the borrower can’t repay the loan. This is to assure the lender they’ll get their money returned in cash or in assets.
  • Terms of Repayment –– Is the payment to be made incrementally or in one lump sum?
  • Default Clause –– In case the borrower does not repay the money, provide terms.
  • Co-signer –– To ensure the borrower repays the loan, a second person should be named if the borrower can’t financially repay the loan.
  • Run a Credit Report –– The best way to find out whether a potential borrower has an outstanding debt is to run their credit report. Mainly, if the debt relates to the IRS or child support, it will take precedence over the promissory note. Consequently, a credit report must be run before entering into any type of agreement.

Written legal permission is a requirement to run someone else’s credit.

Negotiate Essential Terms of the Contract

Borrowers must repay the borrowed money on time and per the note. Otherwise, fees may apply. The lender issues a loan release form to the borrower once they fully repay the money. This form relieves the borrower of all liabilities relating to the note.

Lenders should issue a demand letter if the borrower fails to make a payment on time. The letter contains the terms stated in the promissory note, such as late payment penalties and how many days the borrower has before defaulting.

If the borrower never pays – When a borrower defaults on the note, the lender can collect by seeking the funds through Small Claims Court to minimize their costs. Small Claims typically limit the value of an action to $10,000 or less. The property or asset shall be turned over to the borrower per the note if security was placed in it. In any case, if the amount owed exceeds $10,000, legal action will be necessary.

Fill In All the Necessary Information

Lenders and borrowers need to come together to authorize the formal loan agreement after they agree to the main terms. For instructions on how to fill out the document, line by line, please refer to the How to Write section.

After signing the form, both parties should exchange the money in the presence of a witness. It is not required that a witness sign the form, but it is recommended. For excessive amounts (more than $10,000), it’s best to use a notary public.

Legal Disclaimer

Please note that Lawrina does not provide any legal services. The information on Lawrina’s Site and its downloadable content, including legal articles and templates, shall not be considered legal advice and is not guaranteed to be correct, complete, and up-to-date. If you require legal advice on your issue, we recommend you contact a qualified attorney licensed in your state. You personally assume full responsibility for any consequences, damages, and costs associated with your use of any content of Lawrina Services available on Lawrina’s Site. 

By using Lawrina’s Site you agree with mentioned above and give your irrevocable consent to comply with and to be bound by the provisions of Lawrina Service terms.

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Frequently Asked Questions

Where to get a promissory note?

Promissory notes don’t have any legal requirements, and some people write them themselves for simple purposes. To get started, you can use our printable promissory note template. To ensure the note contains all essential elements and is compliant with local laws, you should work with a professional document preparer, such as Lawrina.

When are promissory notes used?

There are many types of promissory notes, varying in formality and amount. Student loans and personal loans can both be financed with promissory notes, which serve as a legal record of the borrowed amount and protect the lender if the borrower doesn’t make payments.

How do I write a promissory note?

Although promissory notes are often simple, they should include the names and addresses of the lender and borrower. This legal document should include the amount borrowed, collateral details, payment terms, and signatures of both parties. Your promissory note should also include interest rates and amortization schedules, along with payment amounts and dates. Please contact your local attorney or law firm for assistance in drafting your promissory note.