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What Is a Promissory Note?

How promissory notes work.

• What's Included

Types of Promissory Notes

Promissory note repayment, investing in promissory notes, a brief history of promissory notes, the bottom line.

• Personal Finance

Promissory Note: What It Is, Different Types, and Pros and Cons

A promissory note is a written promise by one party (the note's issuer or maker) to pay another party (the note's payee) a definite sum of money, either on demand or at a specified future date. A promissory note typically contains all the terms involved, such as the principal debt amount, interest rate, maturity date, payment schedule, the date and place of issuance, and the issuer's signature.

Key Takeaways

• A promissory note is a financial instrument that contains a written and signed promise between two parties to repay a sum of money in exchange for a loan or other financing. 
• A promissory note typically contains all the terms pertaining to the indebtedness, such as the principal amount, interest rate, maturity date, date and place of issuance, and issuer's signature.
• In terms of their legal enforceability, promissory notes lie somewhere between the informality of an IOU and the rigidity of a loan contract.

Investopedia / Tara Anand

Promissory notes can lie between an IOU's informality and a loan contract's rigidity. An IOU merely acknowledges a debt and the amount one party owes another. A promissory note includes a promise to pay on demand or at a specified future date, in addition to steps required for repayment (like the repayment schedule)

Although financial institutions may issue promissory notes—for instance, you might be required to sign one to take out a small personal loan —they also allow companies and individuals to get financing from a non-bank source. This source can be an individual or a company willing to carry the note (and provide the financing) under the agreed-upon terms. In effect, promissory notes can enable anyone to be a lender.

In its simplest form, a promissory note might be a written promise to repay a family member. State or federal securities entities may regulate more complicated promissory notes.

Typically, there are two parties to a promissory note: The promisor, also called the note's maker or issuer, promises to repay the amount borrowed. The promisee or payee is the person who gave the loan.

Secured vs. Unsecured Promissory Notes

A promissory note can be secured or unsecured. A secured promissory note describes the collateral—typically property—that secures the debt or amount borrowed. For example, if the borrower owns property, the lender can use the car as collateral until the debt is repaid. If the borrower doesn't repay the loan, the promissory note permits the lender to take possession of the property.

An unsecured promissory note doesn't involve collateral. In this case, if the borrower doesn't repay the loan, the lender can try to use standard debt-collection procedures.

In either case, the lender holds the promissory note until the debt is repaid. Typically, those drafting a promissory note will consult with an attorney to make sure the note follows any state or federal laws around loans or investments.

A promissory note is usually held by the party that's owed money; once the debt has been fully paid, the note must be canceled by the payee and returned to the issuer.

What's Included in a Promissory Note?

A promissory note should include all the details about a loan and the repayment terms. In addition to the names of the borrower and the lender, a promissory note may also include:

• Name and address of borrower and lender
• Maturity date
• Sum borrowed
• Payment schedule
• Interest rate and how interest is calculated
• Prepayments process
• Overdue payment interest charged
• Waivers, amendments, and governing law for the promissory note

In the United States, promissory notes are often used when getting a student loan, mortgage, or a loan from a friend or family member. Promissory notes are also sometimes issued to corporate clients.

Student Loan Promissory Notes

Many people sign their first promissory notes as part of getting a student loan . Private lenders typically require students to sign promissory notes for each loan taken out.

Some schools allow federal student loan borrowers to sign a one-time master promissory note, allowing receipt of multiple loans for up to 10 years if the school certifies the student's continued eligibility.

Student loan promissory notes outline the student borrower's rights and responsibilities and the loan's conditions and terms. By signing a master promissory note for federal student loans , the student promises to repay the loan amounts plus interest and fees to the U.S. Department of Education.

The master promissory note also includes the student's personal contact and employment information as well as the names and contact info for the student's references.

Mortgage Promissory Notes

Homeowners usually consider their mortgage an obligation to repay the money they borrowed to buy their residence. But actually, the signed mortgage promissory note represents a promise to repay the mortgage or loan, along with the repayment terms.

Typically, the promissory note includes:

• Amount you owe
• Mortgage loan's interest rate
• Ways your interest rate can change, if you have an Adjustable Rate Mortgage (ARM)
• Payment dates
• Repayment length of time
• Where you send payments
• Consequences of not making monthly mortgage payments

The promissory note describes the debt's amount, interest rate, and late fees. A lender holds the promissory note until the mortgage loan is paid off. Unlike the mortgage or deed of trust , the promissory note is not entered into county land records.

Corporate Credit Promissory Notes

Promissory notes are commonly used in business as a means of short-term financing. For example, when a company sells products but hasn't yet collected payments, cash may run low, leaving the company unable to pay creditors. The company may ask creditors to accept a promissory note to be exchanged for cash after the company collects its accounts receivables .

Or the company may ask the bank for cash in exchange for a promissory note. Promissory notes offer companies a credit source after exhausting other options, like corporate loans or bond issues. A note issued by a company in this situation is at a higher risk of default than, say, a corporate bond. The corporate promissory note's interest rate will likely provide a greater return than a bond from the same company, as high risk means higher potential returns.

These notes must be registered with the government in the state where sold and with the Securities and Exchange Commission (SEC).

If the note is not registered, the investor has to analyze whether the company is capable of servicing the debt. Companies in dire straits may hire high- commission brokers to push unregistered promissory notes on the public. If the company defaults, the investors' legal avenues may be somewhat limited.

There are several different structures for repayment of a promissory note, but most involve repaying the principal plus interest. The interest rate can be fixed or variable and calculated daily, monthly, annually, or in another way. In some states, interest rates may be capped by state law. A certified accountant and attorney can advise you on the tax or legal implications of the promissory note's repayment schedule.

Here are various repayment approaches for a promissory note:

• Installment note : The most familiar repayment approach is through installments, with the borrower making regular payments; the repayment schedule and interest payments can vary.
• Simple note: For smaller loans, borrowers might arrange a lump-sum repayment on a specified date, meaning that's when you'll repay the whole amount listed in the promissory note.
• Open-ended note : This promissory note allows the borrower to draw on an operating or other loan over time and repay the draw plus interest by a specific date.
• Demand note : Sometimes, a promissory note may specify "on demand" repayment, meaning that the note must be repaid at the lender's request at any time.

Company or corporate promissory notes are rarely sold to the public. When they are, it is usually at the behest of a struggling company working through unscrupulous brokers who are willing to sell promissory notes that the company may not be able to honor.

Alternatively, the promissory note may be part of a scam sold by life insurance agents or online or out-of-state investment advisors. Some sellers may know nothing about the investments' true origins—the promissory notes may be for companies that don't exist. Promissory notes promising "low risk, high yield" investments may lead to a type of fraud, according to the SEC.

Before investing in promissory notes, ensure all of the following are true:

• The person selling the promissory notes is licensed to sell securities 
• The company offering promissory notes is legitimate and can repay debts
• Promissory notes are properly registered by the SEC, state securities regulator, or legally exempt from registration
• If guaranteed or insured by a foreign insurance company, contact your state department of insurance to make sure the company can do business in the U.S.

Investing in promissory notes involves risk. These promissory notes are only offered to corporate or sophisticated investors who can handle the risks and have the money needed to buy a note. To help minimize these risks, an investor must register the promissory note or have it notarized so that the obligation is publicly recorded and legal.

Promissory notes have had an interesting history. At times, they have circulated as a form of alternate currency, free of government control. In some places, the official currency is a form of promissory note called a demand note (one with no stated maturity date or fixed term, allowing the lender to decide when to demand payment).

Promissory notes and bills of exchange are governed by the 1930 Geneva Convention of Uniform Law on Bills of Exchange and Promissory Notes. Its rules stipulate that the term "promissory note" should be inserted in the instrument's body and contain an unconditional promise to pay.

What Does a Promissory Note Contain?

A form of debt instrument, a promissory note represents a written promise on the part of the issuer to pay back another party. A promissory note will include the agreed-upon terms between the two parties, such as the maturity date, principal, interest, and issuer’s signature. Essentially, a promissory note allows entities other than financial institutions to provide lending services to other entities.

What Is an Example of a Promissory Note?

One example of a promissory note is a corporate credit promissory note. For this type of promissory note, a company will typically be seeking a short-term loan. In the case of a growing startup that is low on cash as it expands its operations, the terms of the agreement could state that the company pays back the loan once its accounts receivable are collected.

There are several other types of promissory notes, including investment promissory notes, take-back mortgages, and student loan promissory notes. 

What Are the Pros and Cons of a Promissory Note?

A promissory note can be advantageous when an entity is unable to secure a loan from a traditional lender, such as a bank. However, promissory notes can be risky, as the lender may not have the same means and scale of resources as traditional financial institutions. At the same time, legal issues could arise for both the issuer and payee in the event of default. Because of this, getting a promissory note notarized can be important.

A promissory note is a written promise by one party to make a payment of money at a date in the future. Although potentially issued by financial institutions, other organizations or individuals can use promissory notes to confirm the agreed terms of a loan. In short, a promissory note allows anyone to act as a lender. However, the average investor should be wary of and heavily research any sales pitches for promissory notes as an investment.

University of Vermont Extension. " Guide to Financing the Community Supported Farm ," Page 26 of PDF.

University of Vermont Extension. " Guide to Financing the Community Supported Farm ," Page 27 of PDF.

Stanford University. " Simple Promissory Note (Small Business) ."

Federal Student Aid. " Master Promissory Note (MPN) ."

CFPB. " Guide to Closing Forms ," Page 1 of PDF.

• State of Connecticut Department of Banking. " Promissory Note Scams ."

Ohio State University Extension Farm Office. " Financing the Farm ," Page 3.

Ohio State University Extension Farm Office. " Financing the Farm ," Pages 2–3.

U.S. Securities and Exchange Commission. " Broken Promises: Promissory Note Fraud ."

Investor.gov. " Promissory Notes ."

United Nations Treaty Collection. " 10.Convention Providing a Uniform Law for Bills of Exchange and Promissory Notes ."

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How to Write a Promissory Note

Last Updated: February 5, 2024 Approved

This article was co-authored by Michael R. Lewis . Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas. He has over 40 years of experience in business and finance, including as a Vice President for Blue Cross Blue Shield of Texas. He has a BBA in Industrial Management from the University of Texas at Austin. wikiHow marks an article as reader-approved once it receives enough positive feedback. In this case, 85% of readers who voted found the article helpful, earning it our reader-approved status. This article has been viewed 1,451,497 times.

A promissory note is a written agreement to repay a debt. Sometimes referred to as a note, this document is legally enforceable. Taking the time to learn how to write a promissory note, or write an IOU, will help in your collection endeavors.

Sample Promissory Notes

Writing Your Own Promissory Note

• The amount of the loan — the amount that is borrowed and owed.
• Repayment dates — the date payments are due or the loan must be repaid.
• Interest rate — the rate charged or paid on borrowed money. Interest rates are calculated in terms of annual percentage rate or APR.
• Amount after interest has been applied or PI (principle + interest).
• The Pledge of Security Agreement or Collateral hold. List any goods or services and the value used as a guarantee of the debt to be paid.
• Terms for late or missed payments, if applicable.
• Default terms — what will happen if the borrower fails to repay in a timely manner.

• You may want to include a repayment schedule with specific due dates in the note if there are going to be monthly or weekly payments.

• An unsecured promissory note requires no collateral to borrow. Good to excellent credit is required to get an unsecured loan.

• UCC forms differ by state and must be filed with your state's Secretary of State.
• The form should include a description of the collateral and its value. [5] X Research source

Ensuring the Note is Enforceable

• Legal names of all parties that have a vested interest in the transaction.
• Address and phone numbers of each party involved, including the lender.
• The signature of the borrower and a witness. The lender's signature may or may not be required. The requirement varies by state.
• Purpose — what the money will be used for. This requirement will also vary by state.

• If there was collateral that secured the promissory note, make sure that any liens are cancelled or terminated.

Collecting on an Unpaid Note

Expert Q&A

• If in doubt, have your Note checked. Save a Fortune on Agreements and Contracts is a good start. Thanks Helpful 0 Not Helpful 0
• Once a note has been signed it becomes a legal document. Thanks Helpful 0 Not Helpful 0

• The lender should be aware that an unsecured loan is not repayable if the borrower declares Chapter 7 bankruptcy. Thanks Helpful 1 Not Helpful 4

You Might Also Like

• ↑ http://www.nolo.com/legal-encyclopedia/promissory-notes-personal-loans-family-30118.html
• ↑ https://www.lawdepot.com/contracts/promissory-note-form/?loc=USNY&pid=googleppc-promis_usny-mainT2_a1-s-ggkey_promissory%20note%20forms&gclid=CjwKEAiA1JuyBRCogJLz4J71kj0SJADsd6QR5rHLcI0FFbi1H7ptoOsCrtmrvyxdYKi5nbX4JETrhRoC85jw_wcB#.Vkda9aSFOJc
• ↑ http://www.law360.com/articles/651272/creating-perfect-security-interests-a-primer
• ↑ http://www.sos.ca.gov/business-programs/ucc/financing-statement/
• ↑ http://wilawlibrary.gov/topics/contract.php
• ↑ https://www.legalzoom.com/download/pdf/release-of-promissory-note.pdf

About This Article

To write a promissory note, start by writing down the agreement, being sure to include the amount of the loan, by when it needs to be repaid, and the interest you’ll charge. You should also include what will happen is a payment is missed or late, or if the person defaults on the loan. After they have been informed of your right to transfer or cancel the debt, have the borrower sign the note. Keep reading for advice from our Financial reviewer on how to collect on an unpaid promissory note. Did this summary help you? Yes No

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Promissory Note Templates

 Most of us have heard about a promissory note and, perhaps at one time or another, some of us may have already made one. In its simplest form, a promissory note form is a written IOU promising to pay a certain party a debt. This also applies in the business world, although it becomes more formal. Here, a promissory note PDF is a document that carries more meaning.

Promissory Note By Type

Secured promissory note.

Unsecured Promissory Note

Promissory Note By State

• Connecticut
• Massachusetts
• Mississippi
• New Hampshire
• North Carolina
• North Dakota
• Pennsylvania
• Rhode Island
• South Carolina
• South Dakota
• West Virginia

How does a promissory note work?

Regarding the legal enforceability of a promissory note, you can say that it lies between the common IOU’s informality and a loan contract’s rigidity. In an IOU, there is an acknowledgment of the existence of the debt and the amount that the issuer owes the payee.

But a promissory note template includes more elements such as a specific payment promise along with the steps the borrower will follow. Related to these is a loan contract which differs from a simple promissory note as the lender states his right to recourse if the borrower doesn’t pay as agreed.

Such conditions are usually not found in a simple note. A promissory note may contain the penalty of non-payment, but it usually won’t contain the course of action to take if the borrower fails to pay in a timely manner. Even if these notes aren’t conditional, they are still negotiable instruments used extensively in business dealings .

At times, many people will sign such a note even without knowing it. For instance, the process of acquiring student loans involves the signing of a promissory note form. With private lenders, they require the students to provide this note for every loan they take.

In some schools, it would only require the signing of a master note to release a federal student loan. After the processing of this note, the student may receive several federal loans for as long as his/her school provides proof of the continued eligibility of the student.

Even promissory note examples for student loans contain the outlines of the responsibilities and rights of the student and those of the student loan. When they sign the note for their federal loans, they are already bound to repay the total amount of the loan including the fees and interest that go with it.

The note should also include details like the personal contact details of the student, information about employment if applicable, and the names and details of the personal references of the student.

Promissory notes vs mortgages

Even homeowners think that the mortgage they took as a responsibility to pay back the money which they had borrowed to purchase their home is just that, a mortgage. It’s also considered a promissory note. These borrowers signed the note as a requirement of the financial process in securing a loan.

It represents their promise to repay the loan together with all the stipulated repayment terms. Such note defines the debt amount, late fees, and the interest rate. In their situation, the lender will hold on to their promissory note PDF until such time when the mortgage has been completely paid.

Unlike the mortgage or a deed of trust, a simple promissory note isn’t registered in the land records of the county. People who cannot qualify to obtain mortgages to buy a home can still do so using a promissory note template. They go through a deal known as “take-back mortgage.”

The mechanics of this process are fairly simple. The one selling the property holds on to the mortgage of the property while the buyer provides a promissory note form stating his willingness to pay the full price for the property plus the interest rate that they agreed upon on a regular installment basis. Such payments stipulated in the note may result in positive cash flow.

In general, buyers dole out large down payments when purchasing a house on mortgage. This may strengthen the confidence of the county in the capacity of the buyer to make payments in the future. This can vary, depending upon the state and location. In most cases, the deed of the property is what they use as collateral.

This can revert back to the seller if and when the buyer cannot fulfill his obligations. There are also cases when a third-party may come into play as a creditor in the take-back mortgage in place of the seller. In such a case, matters can get more complex as it may lead to legal issues should the buyer default on his obligations .

On the seller’s perspective, the composition and contents of a promissory note example become very important. For instance, from a tax perspective, it’s recommended to set a higher price sale for the home, then charge a lower rate of interest to the buyer.

Doing this makes capital gains tax-free on the home’s sale, although the interest will get taxed. On the other hand, a low selling price with a high-rate interest rate is more advantageous for the purchaser as he can write the interest off.

Moreover, if the buyer can faithfully pay the seller after one year or more, he may refinance at a reduced rate through the bank with a traditional mortgage. In such a case, it becomes ironic that the purchaser, after building up the property’s equity, won’t have any problems getting refinancing from to purchase it from the bank.

Characteristics of a promissory note

A promissory note is an official financial document issued by an entity where he/she promises to pay a debt he/she owes to another entity. It’s a written tool with the maker’s signature which includes a promise to repay a certain amount of money either on an agreed-upon date or on-demand and under the terms.

A promissory note template is a short-term tool that doesn’t amount to either a currency note or a banknote. Its characteristics include:

• There should be an unconditional and clear promise to repay a specific amount to a specific person.
• The maker must duly draw and sign it.
• It must have an official stamp.
• It must specify the names of the payor and payee.
• It must specify the payment amount given in words and figures.
• The payment amount must be in the legal currency of the country.

Parties of a promissory note

The contents of a promissory note PDF are of varying conditions and terms relevant to indebtedness. These may include the total amount owed, its maturity date, the interest rate, payment terms, date of issuance, the name of the drawer, and so on.

The document requires no acceptance. The parties involved in a simple promissory note are the following:

This refers to the person who promises repayment to another. This person is also referred to as the borrower or debtor.

This refers to the person the note is in favor of. This person is also referred to as the creditor and is the one responsible for providing the goods. He/she is the entity who lends the money.

This refers to the person to whom the payment gets made as defined by the negotiable tool.

How To Create Promissory Note

A promissory note is simply constructed and the signatories can create it to reflect the terms that they have agreed upon. Here are some steps to help you make your own promissory note template:

Place this should on top to serve as the document’s effective date.

Specify the lender’s name or the person who will make the loan along with the borrower, the one who will repay the debt. Make sure to include, aside from the names, the addresses of the parties too.

This is the total amount the borrower will pay back to the lender plus interest.

For instance, you may agree that the first payment would occur 30 dates from the loan date and on regular intervals after that. The parties can also draw their own schedule that suits their situation which may also involve the payment of a lump sum. The promissory note form should also state if there is any grace period before the due date of the very first payment. Here are some tips for creating your payment schedule: – Expressed clearly and in detail, the date by which your loan must be fully paid. If you plan to pay in installments, include the date of the final payment. Specify if there is any collateral which the borrower may use if applicable. Also, indicate how such collateral can be either liquidated or sold if, for some reason, the borrower cannot pay the loan back. – Include default provisions in the note, such as agreed-upon fees, should the borrower make any late payments.

Once you have finalized the note and both parties have agreed with it, the parties can now affix their signatures with the date on the note. Copy the note and provide a copy to both parties. Keep this promissory note on file until the full payment of the debt.

Once it has been fully paid, the lender must provide a receipt as an indication of the completion of the debt.

How to Write a Promissory Note

Find out what's included in a promissory note, how to write one, and download a free template. Includes frequently asked questions.

Updated on September 19th, 2023

The SMB Guide is reader-supported. When you buy through links on our site, we may earn an affiliate commission. Learn more

A promissory note is a document written by a borrower to a lender. The note acts as a formal promise to pay whatever funds are owed, either on-demand or by a specified date. Promissory notes may be used when businesses borrow money from private/alternative lenders or even financial institutions in some cases.

Promissory Note Template - Free Download

Use our promissory note template in Microsoft Word to create your own customized note.

What to Include in a Promissory Note:

• Names of debtor(s) and lender(s).
• The amount of the loan.
• Terms (repayment timeline, interest, etc.).
• Signatures of both parties.
• Details about collateral, if applicable.

Secured vs. Unsecured Promissory Note:

A secured promissory note is one that comes with collateral for the lender to hold until their money is paid back. The lender may specify what collateral will be acceptable.

An unsecured promissory note is a promissory note that is written without any collateral. Unsecured notes may be used with small sums of money where there is less risk of the borrower defaulting.

How legal is a promissory note?

A promissory note is a legally binding document, just like a contract. It can be upheld in a court of law if both parties have signed the note.

How do you write a promissory note?

Your note should include the names of both parties, signatures, the amount of money being loaned, and the terms of repayment.

What is an example of a promissory note?

If a new business needs short-term funding to purchase more inventory, they may write a promissory note for $10,000 to a private lender who gives them the money for two months and changes interest at whatever rate both parties agree to. See our template for another example .

Is a promissory note negotiable?

Yes, a promissory note is negotiable in the sense that its ownership can be transferred. Thus, the original lender may be able to sell it to another party and transfer their ownership, meaning that the new party has the right to debt.

Will a promissory note stand up in court?

Yes. A promissory signed note is legally binding, just like a contract.

Can a promissory note be handwritten?

As long as the note is signed by both parties, it is considered to be a legal document, even if it is handwritten.

How long does a promissory note last?

Promissory notes are subject to the statute of limitations in whatever State they are written. The statute ranges from 3 years to 15 years. Check your State's laws regarding promissory notes for more information.

Who can issue a promissory note?

A promissory note can be issued by either an individual or a corporation. If a corporation issues a promissory note, it will accept all liability associated with the debt.

Do banks accept promissory notes?

In some cases, banks may accept promissory notes as a means of helping you to qualify for a mortgage or loan. However, you can't "cash in" your promissory note at a bank.

What is the difference between a check and a promissory note?

A check can be deposited directly into your bank account, while the money from a promissory note can only be obtained directly from the debtor.

Do both parties have to sign a promissory note?

In order for a promissory note to be legal, both parties must sign it. The signatures show that both parties have consented to the terms of the note.

How much does a promissory note cost?

You can draft a promissory note for yourself at no cost, but it is advisable to hire a lawyer who can draft and review the document for you. The cost of this will depend on your lawyer's hourly fees.

What are the types of promissory notes?

• Commerical.
• Real Estate.
• Investment.

How do I mark a promissory note paid in full?

Keep the original note, and once the borrower has paid back their loan in full, mark "paid in full" on the note. Sign the note to verify that it has been paid, and return it to the borrower.

promissory note

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A promissory note is an unconditional promise to pay a certain amount of money to a named party or the holder of the note , or to deposit that money as such persons direct. A promissory note must be in writing and signed by the maker of the promise. A frequent type of promissory note used by banks is a certificate of deposit. Promissory notes are considered a type of commercial paper and are often regulated under contract law.

New York’s Uniform Commercial Code §9-102 defines a promissory note as “an instrument that evidences a promise to pay a monetary obligation, does not evidence an order to pay, and does not contain an acknowledgment by a bank that the bank has received for deposit a sum of money or funds.”

[Last updated in February of 2024 by the Wex Definitions Team ]

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Free promissory note templates

Demand for Full Payment on Installment Promissory Note

Secure your loan repayment with a demand for full payment (on installment promissory note). Help lenders to collect outstanding amounts efficiently.

Demand for Payment on Demand Promissory Note

Make sure your demand for payment is worded right when it's time for the borrower to pay you back. Ensure timely repayment of a loan with a demand promissory note.

Earnest Money Promissory Note

Show your commitment and good faith to buy a property with an earnest money promissory note.

Notice of Default on Installment Promissory Note

Facing a missed payment on a loan you extended? Send a notice of default on the installment promissory note. Prompt your borrowers to fulfill their commitment and get your finances back on track.

Release of Promissory Note

Acknowledge the loan repayment closure with a release of a promissory note. Conclude your agreement amicably, providing clarity and closure for all parties involved.

Secured Demand Promissory Note

Make sure your demand for payment for collateral-backed loans is worded right when it's time for the borrower to pay you back. Ensure timely repayment of a loan with a secured demand promissory note.

Secured Promissory Note (Fully Amortized)

Safeguard your financial arrangement with a secured promissory note. Define the installment payment terms of the loan clearly for the borrower and lender.

Secured Promissory Note (Installment with Balloon Final Payment)

Looking to secure a non-bank loan to be paid back in installments? A secured promissory note helps to protect your financial interests and officiate lending agreements.

Secured Promissory Note (Interest-Only with Balloon Final Payment)

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How To Write A Promissory Note

Jump to section, what is a written promissory note.

A promissory note, or a note payable, is a legally binding document used by the borrower when loaning money to make a promise of repayment to the lender. The promise of repayment is typically during a fixed time or date or on demand.

In general, promissory notes are used to govern the transaction between a lender and a borrower. They set the terms and conditions of the transaction.

Types of Promissory Notes

The types of promissory notes often reflect the type of loans that they are written for. Some common types of promissory notes are discussed below:

• Simple Promissory Note: A simple promissory note is a written guarantee that money borrowed will be returned to the lender in an agreed-upon way. It does not detail the purpose of the loan.
• Student Loan Promissory Note: A student loan promissory note, or a master promissory note from the government, is an agreement that a borrower will repay their student loans with the interest charged. Most student loan promissory notes are between a borrower and the government but students may also create promissory notes with their parents or relatives who provide funding for their education.
• Real Estate Promissory Note: In a real estate promissory note, the borrower uses their property as collateral. If the borrower defaults, the lender can place a lien on the collateral. This makes the information public record and impacts the borrower’s credit.
• Personal Loan Promissory Notes: A personal promissory note is used to record a loan between friends or family members.
• Car Promissory Note: A car promissory note is used during the sale or exchange of a car. It creates an agreement that the borrower will make payments to the lender in exchange for a car. Other vehicles also follow the same process of producing a vehicle promissory note to record loans.
• Commercial Promissory note: A commercial promissory note is used when money is borrowed from a commercial lender such as a bank or loan agency. If the borrower defaults or is unable to make timely payments, the lender can demand full payment of the loan with interest. The lender is also entitled to place a lien on assets owned by the borrower till the lender has received all repayments.
• Investment Promissory Note: An investment promissory note, often used in place of a business loan, is used to raise capital for businesses. They ensure that the investor receives a return on their investment over a given period of time. This reduces the risk of investing in a business. If the borrower fails to pay, the investor is entitled to take ownership of the company.

Promissory notes can also differ based on the type of payment they use:

• Installment Payment: An installment payment promissory note is generally used when purchasing expensive items. Payments are sent in installments or divided up in batches.
• Installment Payments with a Final Balloon Payment: These are used mostly in mortgage loans. The borrower pays small installments before paying a large sum of repayment back in one go.
• Due on a Specific Date : Due on a specific date (DOSD) promissory notes require the repayment of a loan or debt before a certain date
• Due on Demand or Default: A due on demand or default promissory note is a pay when you can type of note mostly used between family and friends for small loans.

Here is more on types of promissory notes.

How To Write a Promissory Note – Step by Step

You can write your own promissory note by following some easy steps below:

• Date : You should include the date on which the promissory note was created at the top of the page.
• Amount : Always include the amount of money being borrowed. This avoids any future disagreement and alteration.
• Loan terms : The note should also include the terms of the loan. The loan terms explain how the loan will be paid back, when and the method of repayment. It includes specific dates and timelines.
• Interest rate . You should mention the rate of interest on the loan. This section should mention if the loan is fixed or variable.
• Loans are often backed by a collateral in case the borrower defaults. A collateral provides security for the lender. Often providing a collateral lowers the interest rate on loans. These are known as secured loans. If the loan is secured by collateral, the promissory note should provide details about the collateral and its value.
• Default terms: The promissory note should also mention the terms of default.
• Lender and borrower information. This section covers the information about all parties involved in a loan. It describes the lender and the borrower along with their addresses and contact information.
• Signatures : All parties must sign the note for it to be legally enforceable. Generally promissory notes only need to be signed by the borrower that is making the promise.
• Release of Promissory Note : Once the loan is paid back, the commitment of the parties in the promissory note can also be brought to an end. For this you will need to issue the release of the promissory note.

Here is more on elements of promissory notes.

See Promissory Note Agreement Pricing by State

• Connecticut
• District of Columbia
• Massachusetts
• Mississippi
• New Hampshire
• North Carolina
• North Dakota
• Pennsylvania
• Rhode Island
• South Carolina
• South Dakota
• West Virginia

How Do Promissory Notes Work?

A promissory note is a promise to pay back a loan but is different from a loan agreement or mortgage note . While all three record a loan, the loan agreement provides a more detailed account of the loan transaction. A loan agreement contains important information and clauses dictating repayments, disputes, etc. Both the lender and the borrower need to sign the loan agreement. A promissory note is simply a formal promise that the borrower will repay the loan. It only needs to be signed by the borrower.

Examples of When To Use a Promissory Note

A promissory note can be used in the following events:

• Student Loans: If you are borrowing money for educational purposes, you can use a student loan promissory note to signify that you will be repaying your student loans.
• Car Loans : If you are buying a vehicle, such as a car, you can use a car promissory note to ensure the lender that you will be paying back the car loan under the set terms.
• Business Loans: If you are borrowing money to invest in your business or to start a business, you can use a business promissory note to ensure the lender that you will be paying back the loan under the set terms and timeline.
• Personal Loans : If you are borrowing money from family and friends, you can use a personal promissory note to promise repayment under set terms.

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Promissory note: What it is and how it works

March 7, 2023 | 4 min read

A promissory note, sometimes called a promise-to-pay agreement, is a written promise in which one party agrees to repay another party. Borrowers who take out personal loans, student loans and mortgages may need to sign a promissory note. And businesses sometimes use these documents to raise funds.

But when does someone need a promissory note and how do they work?

Key takeaways

• A promissory note typically states that a borrower promises to repay a lender a certain amount of money by a specific date.
• These notes are legally binding and may include loan terms—like the principal amount, interest rate and payment schedule.
• Both parties are typically required to sign the note, but exact requirements may vary.

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How does a promissory note work?

A promissory note is a written promise to pay back money. These legally binding agreements typically include debt repayment terms—like payment schedules and interest rates. 

A borrower is expected to follow the repayment terms outlined in the promissory note. If a borrower violates the terms of a valid promissory note, the lender may have the right to recover its money. 

What does a promissory note contain?

Keep in mind that requirements could differ from one state to the next. But promissory notes typically include:

• Names, addresses and signatures of the borrower and lender
• Principal loan amount
• Interest rate
• Lump sum or installment payment amount 
• Payment due date and schedule
• Late fees or other penalties

What makes a promissory note invalid?

Promissory notes are legally binding, but if a note becomes invalid, it may not be enforceable. 

A promissory note could become invalid if:

• It isn’t signed by both parties.
• The note violates laws.
• One party tries to change the terms of the agreement without notifying the other party. 
• An unauthorized person, like the borrower’s relative, signs the note.

Borrowers and lenders may have to go to court if a promissory note becomes invalid.

Types of promissory notes

Borrowers may need to sign promissory notes for a variety of debt agreements. These documents could offer borrowers and lenders some protections if either party doesn’t follow the outlined terms. 

Promissory notes for personal loans

If someone lends money to a friend or family member, a valid promissory note can make the agreement legally binding and help protect both parties’ interests. 

Student loan promissory notes

Borrowers may sign a promissory note when they take out private or federal student loans . Federal student loan borrowers may sign a Master Promissory Note (MPN) that can be applied to multiple loans. 

By signing the MPN, a student agrees to repay all loans according to the terms and conditions of the MPN. Federal student loan MPNs are currently valid for up to 10 years. 

Promissory notes for investors

Businesses sometimes use promissory notes for short-term financing. These notes can carry investment risks and may need to be registered with state or federal agencies—like the Securities and Exchange Commission . 

Promissory note vs. mortgage: What’s the difference?

When someone buys a home with either a mortgage or deed of trust, they may need to sign a promissory note.  

What a promissory note means during the homebuying process

The promissory note is a written agreement that outlines the mortgage terms and conditions, and it’s typically signed at closing. It may include the loan amount, loan term, payment amount, due date and more. 

If a borrower doesn’t comply with the promissory note terms, the lender may have the right to foreclose the property. 

What a mortgage means during the homebuying process

A mortgage refers to the loan a homebuyer uses to purchase a property. The purchased property is typically used as collateral for this type of secured loan. Homebuyers technically don’t own their homes until the mortgage is repaid in full. But as payments are made on the mortgage, a homeowner’s equity grows.  

Promissory notes in a nutshell

A promissory note is a legally binding promise to repay a debt. These agreements could be used for personal loans, student loans, mortgages and more. 

Promissory note laws vary by state, but they typically include the loan amount, loan terms and signatures from both the lending and borrowing party. If the promissory note doesn’t meet certain requirements, it may become invalid.

Interested in learning more about loans and lines of credit? Check out this guide on different types of debt .

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What Is A Promissory Note

There are various financial tools for executing payments. One of the most common is “promissory notes.” In this article we will explain what a promissory note is, its implications and how it works. We’ll also delve into what happens if I don’t pay a promissory note. This matter is a very common reason our experienced NY estate planning attorneys receive questions on a daily basis.

Keep reading. With the information detailed below, you will have the knowledge to make an informed financial decision. This allows you to decide whether to sign a promissory note. And what to look for before doing it. You can also protect yourself from falling into debt that can drag you into a more complex situation, such as  bankruptcy .

Table of Contents

• Specific definition of what a promissory note is
• Legal characteristics of a promissory note
• What happens if I don’t pay a promissory note?
• Promissory note debts in bankruptcy
• Difference between promissory note and contract
• What should you include if you want to draft a promissory note?
• Ortiz & Ortiz advises you case by case

Specific Definition Of What A Promissory Note Is

A promissory note is a financial instrument that contains a written promise from one party (the issuer of the promissory note) to pay another party (the beneficiary of the promissory note) a defined sum of money. A promissory note generally contains all the terms related to the borrowing, this includes details such as:

• The principal amount.
• The interest rate.
• The expiration date.
• The place of issue.
• The issuer’s signature.

Promissory notes are common documents in any financial service. You have likely signed one if you have obtained any type of loan in the past. Other names that a promissory note may receive are:

• Commercial paper.
• Demand note.
• Loan agreement.

As we mentioned earlier in this article, a promissory note establishes a clear record of a loan, either between individuals or between entities. By putting all relevant details in writing, a promissory note ensures clarity about due dates and the amount of payments. This seeks to avoid any type of misunderstanding or inconvenience between the parties.

When Should I Use A Promissory Note?

A promissory note is commonly used for the following transactions:

• Business loans.
• Auto loans.
• Personal loans between friends or family.
• Student loans.

If you are lending money to an individual or business, you may want to formalize the loan by creating a promissory note. A promissory note is especially important if you are borrowing a large amount of money. The promissory note works as a legal record of your loan, helping to protect it and ensure that a person or organization repays you.

Types Of Promissory Notes

Next we will mention the most common types of promissory notes. As you will see, this type of document is used for multiple activities.

Types Of Promissory Notes According To Investment Use

• Commercial : This type of promissory note is quite formal. Since one of the participating parties is a company that has standardized processes. This part is the one that is normally qualified as a creditor. That is, it lends money to the natural person or company that is committed to paying.
• Personal or informal : This type of promissory note usually involves a family member or friend who lends a sum of money to another family member or friend. Even though the relationship is close, it is always recommended to write down the details of the agreement. So there is clarity of amounts, dates and all commitments. This implies that both parties keep a copy of the signed document. All to avoid misunderstandings and future problems.
• Investment : A company may decide to issue a promissory note to raise capital. This allows you to inject resources into the operation of the company. And thus, to be able to enhance its growth. The company can also sell these notes to other investors. This implies that the company’s proprietary distribution is diversified.
• Real estate : These types of promissory notes accompany a home loan or other real estate purchase. That is, they are part of the payment commitment that is usually contracted in the medium or long term with the creditor.

Types Of Promissory Notes According To Type Of Loan

Different types of promissory notes are appropriate for different types of agreements. When creating or choosing a type of promissory note, you should make sure that it fits the type of transaction in which you are involved. Promissory notes can be as simple as a one-time payment from a friend. Transactions like auto loans and mortgages require more complex promissory notes that cover details like repayment schedules, interest rates, and more.

Types of promissory notes include the following:

• Simple Promissory Note : If you are writing a promissory note for a lump sum payment, you will normally use a simple promissory note. An example is loaning your sibling $ 2,000. Your sibling agrees to pay you back before January 1. A simple promissory note will indicate that the full amount is due on the date indicated; you will not need a payment schedule. You can decide whether to charge interest on the loan amount and include the interest in the document if necessary.
• Pay on demand : A note on demand makes the payment when the lender requests the return of the money. Generally, you will need to provide a reasonable amount of notice to use this type of promissory note.
• Guaranteed note : A guaranteed note secures the amount loaned against a valuable asset, such as a house or vehicle. If the borrower does not repay the loan amount within the agreed term, the lender has the right to confiscate the borrower’s property. For example, when you buy a house, the house is collateral on your mortgage. Your bank can repossess your home if you don’t make the stipulated payments.
• Unsecured Promissory Note : This type of promissory note does not allow the party that lends the money to secure an asset for the loan. If the borrower fails to make the payment, the lender must file it in small claims court or go through other legal processes to enforce the promissory note.

Legal Characteristics Of A Promissory Note

Committing to a promissory note is as official as any other debt. The legal implications of this commitment between two parties is regulated by law in the United States. Here are some features to keep in mind if you are considering committing to a promissory note.

The Promissory Notes Are Legally Binding

A promissory note or letter is a legally binding document. This means that it forces a person or organization to pay another person or organization a certain amount of money in a certain period of time.

Almost all types of loans are considered a legal promissory note of one type or another. However, the question of whether a real note drawn up by people is affected during bankruptcy is often a confusing topic of conversation.

The Legal Status Of Personal Promissory Notes

Following the previous point, personal promissory notes are often viewed by many as mere promissory notes. Personal promissory notes do not receive the same recognition as a credit card agreement or a mortgage note. This is because people believe that they are informal contracts that are simply documented on paper. The reality is that this idea is wrong. In fact, it couldn’t be further from the truth. Let’s continue reviewing this point:

The Legal Status Of A Signed Promissory Note

A signed promissory note or letter of promise, regardless of the amount of money borrowed or the terms of repayment of the money borrowed, is as legally binding and enforceable as a mortgage note on an expensive home. We know that it is easy to get confused. No matter the size of the loan, the obligatory nature of the payment islegally binding.

The Promissory Notes Have The Same Value As Other Debts

Do not be confused. The terms and values ​​of a legal note do not matter when it comes to the performance of the note. In the eyes of the law, all promissory notes that are legally signed are considered equal. Therefore, if an individual who has signed a personal note with another individual goes bankrupt, that note becomes part of the individual’s personal liability. This means that the money owed under the promissory note is kept under the terms of the bankruptcy court.

Note: If you want to make sure you have no outstanding debts or promissory notes you can find answers in our article how to know if I have debts in the United States. In it we detail the complete process. We also recommend you review our article where we explain what happens if I am sued and I have no way to pay.

What Happens If I Don’t Pay A Promissory Note?

The consequences of not paying a promissory note are different for each case. By signing a promissory note, you may be assuming different types of debts. The type of debt acquired by signing the promissory note will determine what happens if you fail to pay a promissory note. That is, what happens if you do not pay the debt on your loan that you promised to pay. Penalties can vary depending on the lenders. And the consequences of not paying the promissory note must be stated in writing at the signature of the promissory note.

As we saw a few paragraphs above, promissory notes are legally binding documents. Someone who fails to repay a loan itemized in a promissory note may lose an asset that secures the loan, such as a home. It could also face other actions.

If you have not paid a promissory note, or if you find yourself trying to get a loan repaid, here are the steps most commonly taken to resolve the matter:

• First, it is usual to request payment in writing. A written reminder may be enough to rush a pending payment. Overdue notices are commonly sent 30, 60, and 90 days after the stated expiration date.
• In the event that after the notifications, the payment status is still pending, the most common next step would be a request for a partial payment. The parties can create a debt settlement agreement. This in case the creditor decides to accept the partial payment of a debt. You can also consider creating an extended payment plan. Thus, this would allow the borrower to repay the full amount over a period of time agreed by both parties.
• There is also the figure of a “debt collector” to obtain payment. A debt collector is an outside person who works to collect the promissory note. Generally the collector takes a percentage of the payment.
• Alternatively, the creditor can sell the note to a debt collector. Selling a promissory note to a debt collector gives the debt collector ownership of the loan and the ability to collect the full amount.
• Usually as a last measure, the creditor can sue the borrower for the full amount owed.

Payment Slip

The promissory note should detail the process by which you will repay the loan. You can include the required payment amount and the number of expected payments during a given period. Failure to pay constitutes breach of the agreement.

There are two types of debt: secured and unsecured. In the event of non-compliance with these, the consequences for the debtor will be different.

Breach Of Guaranteed Debt

If you have a secured debt, you have signed an agreement that says your lender can take your property if you refuse to pay under the terms of the promissory note. For example, if you bought a car with auto dealer financing. If you do not pay according to the terms of the promissory note, the dealer has the right to repossess the car. In addition, your credit score will also suffer.

If the dealer sells the car for less than the amount you still owe on the vehicle, the dealer could get a deficiency judgment against you. In that case, you still owe money for a vehicle you no longer own.

Breach Of Unsecured Debt

If you default on an unsecured debt, the lender cannot take any collateral from you. However, the lender may take different avenues to try to get your payment.

If we take student loans as an example, we will see the following. If you refuse to repay the student loan as agreed in the promissory note, your credit will suffer. If your student loan is held by the federal government, your wages can be garnished and  any tax refunds you may have can be withheld.

In the case of non-priority unsecured debts, the creditor may have to sue to recover the debt. If they win the judgment, they could garnish wages and / or bank accounts to obtain the money owed to them.

Note: Constantly stressing about not being able to pay your debts is not a situation that you should take lightly. If you are considering filing for bankruptcy, review here how to file for bankruptcy in New York and our article on consequences of filing for bankruptcy in the United States.

Promissory Note Debts In Bankruptcy

Promissory note debts are official and legally valid debts to be considered as antecedent in a bankruptcy filing process. Below we can see what happens to the most common bankruptcy cases in the United States.

Depending on the type of bankruptcy, the promissory note can be resolved in two ways:

• Through liquidation:
• Through a payment plan.

Chapter 7 Removes The Liability Of The Debtor

In Chapter 7 bankruptcy, all personal responsibility for repayment of the promissory note is eliminated and the person no longer has a legal obligation to repay the promissory note. In this case, the individual may agree to repay the promissory note after bankruptcy if the promissory note was between him and a friend, but he is not legally obligated to do so.

Chapter 13 Restructures The Amortization Of The Note

In Chapter 13 bankruptcy, the bankruptcy court consolidates all debts. And establish a reorganization plan and monthly payments. In this process, the note holder will receive a refund of the note, but not according to the original terms of the initial legal note.

Note: If you’re interested, here’s our article on Different types of bankruptcies in the United States. And also a direct access to contact with our expert bankruptcy attorneys in New York.

Difference Between Promissory Note And Contract

You must be clear that a promissory note is not the same as a contract. A contract spells out all the terms of a legal agreement. A promissory note covers only broadly speaking agreements. That is, the basics to solve a simple loan. A contract is much more detailed. For example, it includes clauses for its dissolution. It also contains antecedents that detail the commercial relationship between the signing parties. Thus, both parties take on a responsibility with which they must comply in a timely manner, as established in the contract.

Some examples of points that are common for both types of documents are:

• The deadline by which someone must be paid.
• How a person or organization should be paid.
• How much should a person or organization be paid.

What Should You Include If You Want To Draft A Promissory Note?

A promissory note must include all the terms and details that both parties to a loan agree to. Important details for any promissory note include the following:

• Payer or borrower : It may seem obvious, but it never hurts to remind you to include the name of the party who promised to pay the declared debt.
• Beneficiary or lender : As in the previous point, include the name of the lender, the person or entity that lends the money.
• Date : Indicate the exact date the refund promise takes effect. And any additional dates that are part of the payment plan.
• Amount or principal : Indicate the nominal amount of the borrowed money.
• Interest rate : In case the loan carries interest, the promissory note must include the interest rate charged. The interest rate can be simple or compound.
• First payment due date : A common agreement is that the first payment is due on the first day of the month and subsequent payments are due on the first date of the following months. However, this can be flexible and agreed on a case-by-case basis by both parties.
• Details of each payment : If multiple payments are due, the promissory note should include the frequency with which the payments will be made, as well as the amount of each payment.
• Promissory Note End Date : In the case of an amortized loan, a loan canceled in a series of even and equal payments on a specified date. The date the promissory note ends could be the last payment. An agreement could also involve a balloon payment, specifying a date when the entire unpaid balance is due.
• Signatures : Make sure the signatures of both the borrower and the lender are included on the promissory note. For a promissory note to be legally enforceable, the document requires the signature of each of the parties.
• Copies of the document : Make sure you have two identical copies of the promissory note. Thus, each party is left with a signed and validated copy for their support.

Note: If you are in a situation of high level of debt, orr if you have already been through the bankruptcy process, you may be interested in how you can fix your credit and you may want to know if you can take out a personal loan after bankruptcy.

Ortiz & Ortiz Advises You Case By Case

Now you know in detail what a promissory note is about. If you have any questions regarding the commitment it means, or regarding what to do in case of non-compliance and its consequences, you already know that you can contact us. Our firm has experts with more than 30 years of combined legal and financial experience serving New York.

We can help and guide you in all aspects of your estate planning. Also in bankruptcy proceedings. And of course in all the legal aspects that these processes imply.

Get in touch with our financial experts. This will ensure that you comply with all applicable rules and regulations governing asset management, promissory notes, and bankruptcy procedures.

Call us today so we can hear about your case and begin to develop an action plan to protect your assets, family, and your financial future.

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What are the legal consequences of not paying a promissory note.

A promissory note is an essential legal document that outlines the terms and conditions of a loan between two parties. Understanding the obligations and responsibilities associated with a promissory note is necessary, as failure to abide by those terms may lead to serious legal consequences. Read on to understand the potential legal implications of not paying a promissory note.

Legal Characteristics of Promissory Note

A promissory note typically includes specific legal characteristics, such as:

They are legally binding: Once both parties sign a promissory note, it becomes legally binding.

The parties involved: The document must list the names of all involved parties.

The payment amount and due date: It should also include the full payment amount for the loan and when it must be paid back in full.

Default Terms: Default terms should be included in the note. This outlines what will happen if the borrower fails to repay the loan on time or as agreed, which may have legal action.

The Consequences of Not Paying a Promissory Note

There can be severe legal ramifications if you fail to pay your promissory note in full or on time. The creditor can take several steps depending on the type of loan, such as filing a civil lawsuit against you for breach of contract.

If you are found liable for breach of contract, you may be required to pay back the amount owed plus interest and any court fees or attorney’s fees incurred by the creditor. Furthermore, if you don’t respond or appear in court when summoned, it could result in a default judgment being issued against you. This means that all damages sought by the creditor will be awarded in their favor without your input or defense being considered.

In addition to civil litigation, creditors have other options when pursuing debt collection from delinquent borrowers. Depending on state laws and regulations, creditors may be able to garnish wages or seize assets to repay the debt owed under a promissory note.

Creditors must typically receive permission from a court before attempting either method. However, once granted permission, they can begin collecting debt directly from any source of income or assets owned by the debtor.

Breach of Unsecured Debt

When a promissory note is unsecured, the borrower does not have to use any assets as collateral. If the borrower fails to pay on time or in full, they may be held financially liable for breach of contract. The creditor can pursue civil litigation against them and ask for repayment plus interest, fees, court costs, and other associated damages.

Get to Understand Promissory Notes Today!

All borrowers must understand their rights and obligations when entering any agreement involving credit, including signing a promissory note. Failure to comply with its terms can have serious legal ramifications, including civil litigation, wage garnishment, and asset seizure.

Suppose you are struggling with repaying your debts and need assistance understanding how best to proceed with repayment plans or negotiating settlements with creditors. In that case, you must seek out professional advice from an experienced attorney who can help protect your rights throughout this process.

But still, you don’t have to seek legal assistance when filing a promissory note. Forms.legal offers free promissory note templates that you can fill in, download and print to use as it suits you.

What Is a Promissory Note?

In every lending transaction, from a small personal loan to a home loan, the borrower must promise to pay back the amount they borrowed. They make this promise not by giving their word, but by signing a promissory note.

Promissory notes are a simple but vital component of borrowing money. These legal documents are issued by the lender to secure their right to be repaid. Read on to learn more about what promissory notes are, how they work, and how to create your own.

This blog post is offered for general information purposes only. It does not constitute, and is not a substitute for, legal advice.

What is a promissory note?

A promissory note is a written agreement between a borrower and a lender saying that the borrower will pay back the amount borrowed plus interest. The promissory note is issued by the lender and is signed by the borrower (but not the lender). It is considered a contract, and signing it legally obligates the borrower to pay back the amount borrowed, plus any interest, as defined in the promissory note. 

When do you need to use a promissory note?

A promissory note is essential in any transaction where money is being lent by a person, bank, company, or other organization to another entity. This document is a contract that protects the lender from the risk of the borrower not paying the full amount agreed to by both parties. 

Are promissory notes required for family loans?

A promissory note is like an IOU. However, with an informal IOU between friends or family, there is limited—or no—legal recourse if the borrower does not repay the amount borrowed. For small amounts of money that the lender will not miss, a promissory note is probably not necessary.

However, for any transaction where the lender expects the full amount to be repaid, a promissory note may be a good idea. This may seem like an overly formal way to lend money to loved ones, but in circumstances where repayment is not optional, it provides all parties with a legal framework for how to resolve any unpaid debt. 

Types of promissory notes

There are several types of promissory notes. The features that differ between types of notes include how and whether the promissory note is secured, detail of repayment requirements, and terms of repayment. 

Simple promissory note

As the name suggests, this is a promissory note with only the basics included: the amount owed, the terms, and payment schedule. Simple promissory notes are more common for smaller loans with a single borrower. 

Secured promissory note

A secured promissory note is an agreement where the borrower puts something of value up as collateral to safeguard the value of the loan. In the event the borrower is unable to make payments and defaults on the loan, a secured promissory note empowers the lender to take possession of the collateral in lieu of payment. 

Unsecured promissory note

An unsecured promissory note does not require the borrower to provide any collateral in order to receive the loan. However, an unsecured promissory note is still a contract, and as such the lender has legal options to collect any overdue payments.

Unsecured promissory notes are common in real estate transactions, because the mechanism for securing the loan is the mortgage, rather than separate collateral associated with the promissory note. While they are very similar, the unsecured promissory note only represents the borrower’s promise to pay the full amount plus interest, while a mortgage puts a lien on the real estate that allows the lender to foreclose on it in the case of nonpayment.  

Master promissory note

A master promissory note is an ongoing agreement between the borrower and the lender. Similar to a master services agreement, a master promissory note allows both parties to agree to a set of terms that will govern multiple loan agreements. This type of promissory note is commonly used for student loans, where multiple loans are expected to be taken out over a relatively short period of time. 

Open-ended promissory note

An open-ended promissory note is similar to a line of credit. Rather than receiving the full amount of funds immediately, the borrower only receives a portion and pays that back over the period of time agreed to in the promissory note. This allows the borrower to draw additional funds later that are governed by the same promissory note without having to take more than they initially need. 

Demand promissory note

A demand promissory note foregoes details about multiple payments in favor of a single payment being due upon demand of the lender. These types of promissory notes generally have requirements for advance notice of intent to collect. 

Balloon promissory note

A balloon promissory note has all the usual repayment requirement details, with one important distinction. Instead of an even amount of payments over the term of the loan, smaller payments are made at first and a single large payment is made at the end. These can be appealing for small business borrowers because it allows them more runway for building revenue before needing to pay off the loan. 

How promissory notes are used in business

Promissory notes are commonly used in multiple business contexts. For example:

• Land, building or construction purchases 
• Car or truck purchases  
• Equipment purchases 
• Working capital 
• Employee loans 
• Loans between businesses 

What is included in a promissory note?

At its most basic, a promissory note is simply a contract. As such, it needs to have certain sections to ensure all parties are fully protected and treated fairly. Common sections of a promissory note include:

• Contact information for the borrower and the lender
• Total amount lent
• Terms of repayment, including interest rate and repayment schedule
• Date of the first payment
• Maturity date
• Fees, taxes, and other payments
• Date and location of where the promissory note was issued
• Borrower’s signature (the lender does not sign the promissory note)

This is not an exhaustive list of sections that may be included; depending on the type of loan and the parties involved, it can be customized further. 

Promissory note template 

The Department of Housing and Urban Development has a promissory note template for use in real estate transactions. This template can serve as the basis for additional types of transactions. Once completed, it can be uploaded to an electronic signature system to be signed quickly, easily, and securely. 

Sign promissory notes quickly and easily with Docusign eSignature 

Promissory notes are one example of the many routine legal documents that can be signed using Docusign eSignature .

Our guide, How Does eSignature Work? , has everything you need to know about signing documents electronically.

• Agreements 101

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Breaking Down the Mechanics: How Does a Promissory Note Work?

Definition of Promissory Note: A legal contract promising repayment of a specified amount of money to a lender.

Parties Involved: The borrower (maker) and the lender (payee) are the two parties involved.

Key Features: Principal amount, interest rate, repayment schedule, and maturity date are key features.

Issuing Process: Involves negotiation of terms, creation, and signing of the note by both parties.

Terms and Conditions: Include principal amount, interest rate, repayment term, and default provisions.

Role and Obligations: Lender provides funds and ensures repayment, borrower makes timely repayments.

Secured Vs. Unsecured: Secured notes are backed by collateral, unsecured notes rely on borrower's promise to repay.

Importance in Business: Promissory notes provide clear record of loan agreement, protecting interests of both parties.

Legal Validity: To ensure enforceability, note must include essential elements and clear statement of borrower's obligation to repay.

Risks: Potential for fraud and default are risks involved in using promissory notes.

This guide is not legal advice and laws/rules may change; consult a qualified professional for personalized assistance. Use at your own risk.

Understanding the Basics of a Promissory Note

In the complex world of financial transactions, it is vital to understand key elements like a promissory note. A promissory note is, essentially, a legally binding contract that represents a written promise to repay a specific amount of money to a lender. The involvement of this financial instrument usually brings two parties into play: the borrower, often referred to as the "maker," and the lender, termed as the "payee."

Such notes are often used in various business and personal financial transactions, essentially serving as an official I.O.U. They provide documented assurance to the lender that their money will be returned as per the agreed terms. The borrower, in turn, secures the financing they need, be it for capital investment, property purchase, securing goods or services, or even personal loans between family and friends.

Promissory notes are a staple in the financial world due to their flexibility, convenience, and the protection they offer both parties. However, like any legal document, they must be handled wisely and responsibly to ensure they serve their purpose without creating unexpected liabilities.

Definition of a Promissory Note

At the most basic level, a promissory note is a document detailing money owed from one party to another. It includes a promise by the borrower (or the maker) to pay a definite sum of money to the lender (or the payee). This promise is in accordance with the agreed terms, which typically include considerations such as the principal amount borrowed, the interest rate, and the schedule for repayment.

This legal contract stands separate from informal IOUs or verbal promises to pay. Its enforceability is firmly rooted in law and holds serious consequences for those who violate its terms. It is imperative, therefore, for both the payee and the maker to fully understand their rights and responsibilities under the contract before entering into a promissory note.

It's worth mentioning that promissory notes, while legal, are not suitable or advisable for every situation involving a loan of money. They work best in specific scenarios, like funding business operations, settling personal debts, or facilitating real estate transactions.

Parties Involved in a Promissory Note

A promissory note usually involves two primary parties: the maker, who is the party borrowing the money, and the payee, the party lending the funds. The maker is obligated to repay the borrowed sum under the terms set out in the note, while the payee has the right to demand repayment according to the same terms.

However, these roles are not immutable. For instance, the payee can transfer their rights to another party, known as an "assignee", who then becomes the legal holder of the note. Moreover, the maker can also potentially substitute someone else to assume their obligations under the note. These possibilities underscore the flexibility, as well as the complexity, of promissory notes.

Often, to further secure the repayment, a third party, often known as a "guarantor" or "surety", may also be involved. They pledge to repay the debt if the primary borrower defaults.

Key Features of a Promissory Note

The specifics of a promissory note vary from case to case, reflecting the unique aspects of each loan transaction. However, the key features that define these instruments remain consistent.

The principal amount is the initial loan amount that the borrower promises to repay. This value is the foundation of the agreement and primarily determines the consecutive terms. Another essential attribute is the interest rate, which is the percentage charged by the lender for lending the money. The interest effectively represents the cost of borrowing money.

The note also elucidates the repayment schedule, outlining the agreed-upon dates and amounts for the borrower to make payments. A maturity date is another critical feature, signifying the final date by which the entire loan amount, including interest, should be repaid to the lender.

Well-drafted notes might also detail the implications of a default on payment, stipulations related to premature closure of the loan, and terms for conversion of the note into another form of collateral or financial instrument. Such details serve to protect both parties' interests and to minimize potential disputes or misunderstandings.

How Does a Promissory Note Work?

Process of issuing a promissory note.

The issuance of a promissory note follows a set procedure. The process commences with the initiation of a loan or debt agreement, where the lender and the borrower discuss and distinguish their needs. This conversation gives rise to the negotiation of the terms and conditions of the note, tailored to suit both parties.

Once an agreement is reached, it is time for the creation of the promissory note. This document, in essence, encapsulates all agreed considerations of the loan or debt into a written, legally binding form. It is then signed by all parties involved, hence formalizing the transaction and setting the loan or debt into motion.

The issuance of the promissory note marks the beginning of the established term where borrowing and repayment occur according to the set conditions. Regular repayments, timely fulfillment of obligations, and adherence to the document's provisions are expected from the borrower.

Terms and Conditions of a Promissory Note

The terms and conditions of a promissory note are pivotal. They outline the key elements of the agreement and dictate the obligations of each party. These terms span across the principal amount, interest rate, repayment term, and default provisions. These elements not only establish the timeframe and manner of repayment but also the ramifications of non-payment or default.

Terms and conditions must be carefully detailed, ensuring clarity and common understanding to prevent future points of contention. Their explicit nature serves to protect both the lender and the borrower, leaving no room for discrepancies about what is expected from each party.

It's important to remember that the terms and conditions often vary depending on the nature of the loan or debt in question. Factors such as the amount involved, length of repayment, and the relationship between the parties may influence the specific terms of a promissory note.

Role and Obligations of Each Party

In a promissory note deal structure, both the lender and the borrower assume specific roles and obligations. The lender is tasked with providing the loan or credit amount and ensuring that the borrower upholds their side of the deal by making repayments in a timely manner, as per the note.

The borrower's responsibilities revolve around fulfilling the repayment obligations as outlined in the promissory note. The borrower not only guarantees the lender the return of borrowed funds but also ensures that all the repayments are made within the term specified and at the interest rate mutually agreed upon.

All interactions during the tenure of the promissory note must align with the terms and conditions outlined in the document. Failure to meet these obligations can result in legal consequences and penalties for the defaulting party.

Secured Vs. Unsecured Promissory Notes

Promissory notes can be either secured or unsecured, based on whether they are backed by collateral or not. A secured promissory note provides the lender with an additional layer of security. It outlines specific assets or property that the lender can claim or seize if the borrower defaults on their payment obligation.

On the other hand, an unsecured promissory note does not involve collateral. In this case, the borrower's promise to repay is the sole foundation of the agreement. Consequently, lenders assume a higher risk when dealing with unsecured notes, as their options for recourse are limited in the event of non-payment.

While secured notes offer lenders a greater safety net, borrowers may lean towards unsecured notes as they entail less risk of property loss and generally provide more flexibility regarding repayment terms and conditions.

The Importance of a Promissory Note In Business Transactions

Promissory notes play an indispensable role in business transactions. They serve as clear records of the loan agreement, detailing essential aspects such as terms and conditions, repayment schedule, and potential consequences of default. By encapsulating these details, promissory notes not only streamline financial transactions but also protect the interests of the involved parties.

The clarity that promissory notes bring to borrowing and lending adds trust to the relationship between lenders and borrowers, helping businesses obtain necessary financing. Beyond physical capital, they also ensure a smooth flow of transactions by mitigating potential disputes and misunderstandings.

Finally, the accountability instilled by promissory notes facilitates better financial management and planning for businesses. By having a clear picture of their commitments, companies can create more robust budgets, forecasts, and strategies, ultimately contributing positively to their bottom line.

Understanding How a Promissory Note Works

A promissory note is a financial instrument that contains a written promise from one party – the promisor, to pay a specific sum to another party – the promisee. This agreement is usually between a borrower and a lender, with the borrower promising to pay a definite amount of money to the lender by a specified future date or on demand. The promise to repay is legally binding, making the promissory note an important document in many financial transactions.

This note, more than just plain paper, is a legal instrument that details the terms and conditions about the borrowing and repayment of money. It includes crucial information such as the amount loaned, the interest rate, the repayment date, and the method of repayment. By signing a promissory note, the borrower is contractually obligated to repay the debt under the conditions outlined.

The use of a promissory note offers security and peace of mind to the lender - the promisee. In case the borrower - the promisor, defaults or fails to make payments as agreed, the lender can take legal action to recover the debt. A promissory note thus provides enforceable acknowledgment of a debt and the lender's right to collect that debt.

The Essential Components of a Promissory Note

All promissory notes, regardless of their type or the specifics of the agreement, contain certain fundamental components. A typical promissory note starts with the date and the parties involved in the agreement; the individual or entity borrowing the money (the promisor), and the individual or entity lending the money (the promisee).

Next, it specifies the principal amount or the sum of money borrowed. This component is crucial as it determines the amount of money to be repaid by the borrower. Following this is the interest section. It addresses the interest rate per annum the borrower is expected to pay on the principal loan amount. The interest section plays a significant role in determining the total repayment amount.

The payback structure comes next. This section details how and when the money will be paid back, providing information on the frequency of payments (monthly, quarterly, annually) and the duration over which the loan will be repaid. Lastly, the reference for legal enforcement wherein the promissory note indicates the law that will govern the agreement.

Types and Uses of Promissory Notes

Promissory notes can take various forms depending on their use. For instance, a simple promissory note is used to document a short-term loan between friends or family members. It contains basic information such as the amount borrowed, the interest rate if any, and the repayment date.

Secured promissory notes, on the other hand, are commonly used in real estate transactions or other business dealings where large amounts are involved. These notes are "secured" by an asset or property that the borrower agrees to surrender if they fail to repay the loan.

Lastly, a negotiable promissory note, also known as a bill of exchange, represents an unconditional written order to pay a fixed amount of money on demand or at a specified future time. Negotiable notes are used in commercial transactions and are transferable from one person to another.

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Does a Promissory Note Have to be Notarized

A promissory note only needs the signatures of the parties involved in the agreement, not necessitating acknowledgment by a notary public to be legitimate. 3 min read updated on February 01, 2023

Does a promissory note have to be notarized? A valid promissory note only needs the signatures of the participating parties involved in the agreement, not necessitating acknowledgment or being witnessed by a notary public to be legitimate. Promissory notes are legal documents and legally enforceable because they include the terms and conditions by which money is to be compensated from one party to another.

It is mandatory to have all individuals involved sign the note because it states absolute stipulations to pay certain amounts of money, under certain terms and conditions. To avoid future disagreements about the licitness of promissory notes, businesses may opt to have the promissory notes witnessed and confirmed by notary publics even if some state laws don't demand it.

Some Facts About Promissory Notes

If you have borrowed money from someone and promised to pay them back, then you have taken part in the creation of a promissory note, even if it wasn't initially in writing. Because it is a contract, it is important to get the promissory note in writing when it's established so it is valid and enforceable. If the promise of payment isn't in writing, it is difficult to prove the terms and conditions of the promise as they were agreed upon in a court of law. It would be unenforceable if the compensating party reneges on the promise to pay.

Other facts regarding promissory notes include:

• They are legal documents which specify the terms and conditions for monetary compensation because an agreement was entered into.
• They can be utilized to acquire or increase capital, goods, and credit by businesses.
• They need the signatures of all people involved, which include those who are representing themselves or their companies, with the promise to honor their debt if they are the compensating party.
• If a party borrows money from another party or lender, the borrower must sign a contract before the borrower can have the funds released to him, so the agreement is legally binding.

Elements Required For an Enforceable Contract

For a written agreement or contract to be enforceable, it must contain specific elements called material terms.

• The Parties: A description is mandatory of all the parties involved in the agreement. The parties must be easily perceived according to the description.
• The Promise: The exact statement of what is being agreed upon needs to be specific, to provide clarification. For a promissory note to be explicit, it needs to include the promise to pay a sum of money, the clarified terms or conditions on repayment, and an absolute date for payment.
• Amount Payable: Also called the “sum certain” which is the amount that's compensated to the lender. If the amount also includes interest, calculate the added interest that will be accrued over the time span the agreement is to cover and include it in the amount payable.
• Signatures: It's required that all the parties involved have to sign the agreement. If you choose to have witnesses or a notary public present, also include their signatures as well, although it isn't necessary.

The Notary Public's Role in Signing a Promissory Note

In most cases, there isn't a need for a promissory note to be notarized. Contingent on the kind of promissory note that it is and the controlling legal jurisdiction where you have become associated with, you might need to have a notary republic or some witnesses present during the signing of the note, adding their signatures with the parties involved. If it's not mandatory, having an objective third party, like a notary public, witness the signing of the promissory note will serve as incontestable corroboration when it's necessary to enforce the terms and conditions of the note in a court of law if the other party fails to honor their promise.

If you have further questions about promissory notes and whether they need to be witnessed by a notary public to be legally enforceable according to the laws of your state, contact UpCounsel.com. Post your legal need on UpCounsel's marketplace, and there will be a lawyer to assist you in your situation.

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Home Resources Personal & Family Promissory Note for Personal Loan: A Comprehensive Guide

Promissory Note for Personal Loan: A Comprehensive Guide

Updated March 11, 2024 | Written by Yassin Qanbar Reviewed by Susan Chai, Esq.

Promissory notes serve as binding legal agreements between lenders and borrowers, making them an ideal vehicle to lend money for personal reasons.

With a promissory note, the terms of the loan are documented, which means that both parties know exactly what to expect when it comes to repayment, interest, and any other concerns that may arise.

Before you use a promissory note for a personal loan, make sure you understand the potential legal implications and how the loan may impact you. 

Understanding Promissory Notes

A promissory note is a legal document that lays out the terms of a loan. It formalizes a borrower’s promise to repay a loan and the conditions under which the borrower makes or must issue that repayment.

With a promissory note in hand, both borrower and lender know exactly what to expect from the process, which means that repayment will often go much more smoothly. 

► READ MORE:   Types of Promissory Notes

How Promissory Notes Work

Promissory notes are pivotal in personal loan agreements. They detail the terms of a loan so that neither party has any questions about it, including the repayment schedule and terms.

Furthermore, a promissory note secures the lender’s interests by legalizing the terms of the loan. It may spell out specific consequences if the buyer defaults on the loan or any collateral used to secure the loan . 

Having a promissory note also protects both parties’ legal interests as they move forward with the loan process. While the lender can seek legal assistance if the borrower fails to pay back the funds promptly, the borrower can insist that the lender adhere to the terms of the promissory note, including not seeking repayment before the time laid out in the document. 

Friends and Family

Suppose, for example, that you have a friend or family member who needs a personal loan to help during a hard time. You might choose to issue a personal loan at a lower interest rate than the bank. 

Using a promissory note not only offers you legal recourse if your friend or family member does not pay, but it also lays out more specific terms than a handshake agreement, which means that both of you have a better idea of when the loan will be taken care of.

► READ MORE:   Lending Money to Family and Friends: Should You Do It?

How to Write a Personal Loan Promissory Note

When writing a comprehensive and legally binding promissory note for personal loans, make sure you are clear and specific in all of your terms and conditions. You want to create a document that lays out expectations on both sides and provides protection to both the borrower and lender. 

Step 1 – Include All Relevant Information

Any time you want to craft a legal contract, it’s important to ensure that the document contains all the essential details. By laying out all the information in the contract, you ensure that there are no loopholes that could cause problems later.

Spell out all relevant details, and do not leave anything out, including:

• Date of Issue: The date when the promissory note is written.
• Amount of Loan: The principal amount being borrowed.
• Parties Involved: The names and addresses of the borrower and lender.

• Repayment Terms : The schedule for repayment, including the due date and any installment details.
• Interest Rate : If applicable, the interest rate charged on the loan.
• Security/Collateral : If the loan is secured, details of the collateral.

If there are questions, hash them out before you sign the contract, and include the answers in writing.

Step 2 – Determine Whether the Document Is Negotiable

A negotiable promissory note can be transferred or sold to another party. The other party can use the promissory note much like they would cash or any other investment, and they can transfer it at any time.

In the case of a personal loan between two parties, on the other hand, promissory notes are often non-negotiable: that is, they cannot be transferred, and only the party named in the document has the right to collect on the loan. 

► READ MORE:   Is a Promissory Note a Negotiable Instrument?

Step 3 – Get Signatures From All Parties Involved

To legalize a promissory note, you should have signatures from both borrower and lender. In cases where more than one party will bear responsibility for the loan, make sure to include both signatures. 

Key Features of a Promissory Note

A promissory note will contain several essential features. 

• The amount borrowed: This is the initial amount of the loan, with no interest rates or other details added in. 
• Interest rates: If the borrower will pay interest on the loan, make sure the amount is included in the contract. 
• Repayment schedule: In cases where the borrower pays at specific times agreed upon. State whether payments are due all at once or over time. Note the date of anticipated repayment. 
• Late fees: State whether a late fee is required if the borrower fails to pay on time.
• Consequences for default: Consequences could, for example, include property put up as collateral for the loan and when the lender can take possession of it if the borrower does not follow through on their obligations. 
• Loan security: Whether the loan is secured or unsecured .

Those elements clearly stated can protect both the borrower and the lender in case of a potential dispute.

Legal Implications and Enforcement

If the borrower defaults on the loan, lenders may have legal options for seeking reimbursement . First, they should submit a request directly to the borrower. After that, they may turn to a collections agency or file a lawsuit to recover the funds specified in the document. 

If the loan was secured, the lender may also have the right to seize the property put up as collateral if the borrower defaults. Clear documentation of the loan and its terms can make it much easier to collect since the courts consider the promissory note a legally binding document. 

Transferability and Assignability

In a negotiable promissory note, the lender has the right to transfer, or assign, the right to collect on the loan to a third party. Transferring the loan would absolve the initial lender of the need to collect on the loan, shifting that right to another party. 

A lender might, for example, choose to sell the note to a third party to collect the funds from the loan earlier than anticipated. Selling the loan would provide them with the funds they need immediately. 

The borrower would then pay the new holder of the promissory note. In the case of a promissory note with payment on demand, selling the note could result in the note being called due earlier than anticipated.

In the case of a note with a set repayment schedule or date, however, the new holder of the note would need to hold to the initial terms of the loan. 

Parties Involved

A promissory note is typically a contractual agreement between two parties – a borrower and a lender. The lender will provide the borrower with the amount listed in the promissory note and collect on the note at the predetermined time. 

The borrower promises to repay the lender based on the terms of the promissory note. That may include payments over time, or it may mean that the borrower is responsible for repaying the full amount of the loan at a time named by the lender. 

Interest Rates and Payment Terms

There are several ways to structure interest rates and payments for a personal loan. The promissory note should lay out expectations for repayment so that both parties will understand what is expected of them.

Fixed Versus Variable Interest Rates

Setting interest rates is often complicated. While the banks may have an average interest rate they assign for personal loans, a private loan may have interest rates determined by the borrower and lender. 

Fixed interest rates are set at the time the loan is issued and remain the same for the duration of the loan. Variable interest rates, on the other hand, are changed or revisited at predetermined times throughout the loan’s lifetime and are often based on current market norms.

Variable interest rates often start lower than fixed rates but have the risk of increasing more than anticipated.

Repayment Terms

There are several strategies used to determine repayment terms. The one you choose may depend on the duration of the loan , payment amount, or even on the party to whom you are issuing the loan.

• Lump sum repayments are made all at once, at the end of the loan. 
• Installment payments are made over time, rather than requiring the borrower to come up with the full amount of the loan all at once. 
• If the promissory note is due on demand, the lender must repay the borrower immediately, when requested. 

Accrued interest

Accrued interest is determined by multiplying the loan’s outstanding balance by the interest rate and compounding it daily or monthly, thus increasing the total debt. This interest is added to the loan’s principal, raising the amount due.

Signing and Storing a Promissory Note

By carefully considering the legal requirements for signing and the best practices for storage, lenders and borrowers can safeguard the enforceability and accessibility of promissory notes.

Signing Requirements

Witness Requirements – The necessity for witnesses or notarization can vary depending on the jurisdiction. While not all states require a witness or notary for a promissory note to be enforceable, having a notarized document can add a layer of verification and legal validity.

State-Specific Requirements – Some states may have specific requirements regarding the execution of promissory notes, such as the need for certain disclosures to be included within the note or specific wording. It is important to consult legal advice to ensure compliance with local laws.

Secure Storage of Promissory Notes

Physical Storage – Keep the original signed document in a secure, fireproof, and waterproof location, such as a safe or safety deposit box. Ensure that both parties have copies of the signed note, but the original should be kept with the lender or in a mutually agreed-upon secure location.

Digital Storage – Scanning and storing a digital copy of the note can be a practical step for backup. Use encrypted digital storage solutions to protect the document from unauthorized access. Cloud storage services offer convenient access but ensure they comply with security standards and provide adequate privacy protections.

Access – Whether stored physically or digitally, the storage method should ensure that authorized parties can access the document when needed without compromising security. Establish clear procedures for retrieving the note, especially if stored in a safety deposit box or through a digital platform that requires password access.

Enforceability – The content of the note, such as the amount borrowed, interest rate, repayment schedule, and any collateral, should be clearly stated. Regular updates or amendments to the note should be signed and stored following the same protocols as the original.

The Consequences of Default in Personal Loan Promissory Notes

The consequences of defaulting on a loan laid out by a promissory note can, in many cases, be the same as when a borrower defaults on any other type of loan. The lender may decide to:

• Work with a collection agency to recover the funds laid out in the loan. A collection agency may take possession of the note or pursue the funds for the lender. 
• File a lawsuit against the borrower. Filing a lawsuit can, in some cases, help the lender recover any outstanding balance. 
• Collect any collateral laid out in the loan agreement. 

If the lender does take the loan to collections or file a lawsuit, it can have a significant impact on the borrower, including a decrease in their credit score. The borrower may also face financial repercussions for failing to repay the loan, including wage garnishment .

Note, however, that there can also be financial consequences for the lender when the borrower defaults on a loan. The lender may have to pay the collection agency for their services or allow the collection agency to purchase the promissory note at a discount, which means they may not be able to collect the full amount of the loan.

If the lender chooses to file a lawsuit, they may have to pay for the cost of a lawyer or the cost of court filing fees, which may ultimately lead to unanticipated, higher costs. 

Alternatives to Promissory Notes

If you choose not to move forward with a promissory note, there are other strategies you can use to secure a personal loan. You might, for example, choose to use a simpler loan agreement , which might contain fewer terms or lack the ability to transfer it to another party.

Others may choose to provide collateral, which the lender would hold until the borrower returns the loan amount . While these strategies may prove beneficial, a promissory note offers a higher overall degree of legal protection.

The terms laid out in a promissory note protect both the borrower and the lender, ensuring that their financial futures remain as secure as possible and increasing the odds that both sides will adhere to the terms of the loan.

Laying out those legal terms, from the payment schedule to the date it comes due, is essential for protecting both parties. Before you sign a promissory note as either a borrower or lender, make sure you have a strong understanding of the terms and what they will mean for you.

Yassin Qanbar

Legal Content Editor

Yassin Qanbar is an SEO Content Editor at LegalTemplates, passionate about translating complex legal concepts into helpful, user-friendly information.

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Promissory note in real estate, explained.

Taking out a mortgage means entering a legally binding contract. Like any contract — especially one involving a sizeable financial commitment — there’s a lot of paperwork involved! Knowing the legal jargon upfront isn’t an absolute must, but it’s beneficial to have a few common terms up your sleeve when the paperwork inevitably lands on your desk. One term you’ll almost certainly come across is a promissory note.

What is a promissory note?

When you take out a mortgage, you’ll sign many important documents, including a promissory note and a deed of trust. A promissory note is a legal document that states the borrower is indebted to the lender and promises to pay their mortgage back in full (including the principal and interest rate) by a specified date. Promissory notes describe exactly what you’re agreeing to and provide you with details regarding your loan.

In partnership with the promissory note, the deed of trust states the lender’s legal claim to the asset (the home, in this case) if the terms of the promissory note are not met. For example, if the borrower fails to pay their mortgage according to the terms, it may constitute a breach of the promissory agreement.

Once both the promissory note and the deed of trust are signed, the borrower and lender have evidence of this legally binding agreement. Your lender will typically provide you with a copy of the promissory note, along with several other documents, when you close on your home purchase. The lender will keep the original promissory note until the loan is paid off. There may be some circumstances, such as during a refinance , where the loan terms (and therefore, the promissory note terms) change and you will likely be issued a new document to sign.

Why promissory notes are used

Promissory notes are used to legitimize the agreement between the lender and the borrower in the eyes of the law. No promissory note may mean the loan contract isn’t legally binding or enforceable.

Can you get a mortgage without a promissory note?

Unless the lender uses a different document or terminology for “promissory note,” there typically wouldn’t be a mortgage in place without a promissory note. It is a crucial legal document to the mortgage process that holds both the borrower and the lender accountable to mutually agreed terms and conditions.

What is included in a promissory note?

A promissory note for a mortgage will generally include:

• The amount you owe
• Your interest rate
• Your payment schedule
• The total amount you will pay
• The length of your repayment schedule
• If, and how, the payments will change as time goes on
• Where your payments are meant to be sent

Types of promissory notes

Since a promissory note can be so important, there are two types of promissory notes to know about:

• Secured: A secured promissory note is common in traditional mortgages. It means the borrower backs their loan with collateral. For a mortgage, the collateral is the property. If the borrower fails to pay back their loan, the lender has a legal claim over the asset and, in extreme cases, may foreclose on the property. As mentioned earlier, this is where the deed of trust comes in. Be sure to understand the terms of your mortgage and what may invoke the lender’s right to seize the property.
• Unsecured: An unsecured promissory note is not common in mortgages, but may be something you come across when taking out a personal loan. In this instance, unsecured means it isn’t backed by collateral. Instead, the promissory note is solely based on the borrower’s pledge to pay off the loan. Naturally, unsecured loans come with higher risk. As a result, they may be harder to obtain and often come with higher interest rates.

Promissory notes are an important part of every mortgage. They’re an official representation of your contract and include important details that hold both the borrower and lender accountable. Almost every traditional mortgage comes with a secured promissory note, which means your house serves as collateral for the lender. If you need clarity on the terms in your promissory note, it may help to speak with your lender today.

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