Promissory Note

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.

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.

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.

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 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.

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.

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.

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. 

Promissory notes are useful when:

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

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.

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.

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

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.

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.