Promissory Note Template: How to Document a Personal Loan
A promissory note is a simple but powerful legal document that creates a written promise to repay a debt. Whether you're lending money to a friend, family member, or business, or borrowing money yourself, a properly drafted promissory note protects both parties and provides legal clarity.
What is a Promissory Note?
A promissory note is a financial instrument that contains a written promise by one party (the maker or issuer) to pay another party (the payee) a definite sum of money, either on demand or at a specified future date. It's essentially an IOU with legal enforceability.
Key Characteristics:
- Unconditional Promise: Clear commitment to repay
- Specific Amount: Definite sum of money
- Legal Enforceability: Can be used in court if needed
- Simple Format: Less complex than full loan agreements
- Transferable: Can be assigned to third parties
Promissory Note vs. Loan Agreement
Promissory Note:
- Simpler document
- Borrower's promise to pay
- Less detailed terms
- Good for straightforward loans
- One-sided (borrower's promise)
Loan Agreement:
- More comprehensive
- Both parties' obligations
- Detailed terms and conditions
- Better for complex loans
- Two-sided (mutual obligations)
When to Use Each:
- Promissory Note: Simple personal loans, straightforward terms
- Loan Agreement: Complex loans, multiple terms, business loans
Essential Components of a Promissory Note
1. Parties
Maker (Borrower):
- Full legal name
- Address
- Contact information
- Signature
Payee (Lender):
- Full legal name
- Address
- Contact information
2. Principal Amount
Loan Amount:
- Exact dollar amount
- Written in numbers and words
- Currency specified
- Date of loan
3. Interest Rate
Interest Terms:
- Annual percentage rate (APR)
- Fixed or variable
- Calculation method
- Compounding (if any)
Legal Limits:
- Must comply with usury laws
- Varies by state (typically 8-12%)
- Business loans may have different limits
4. Repayment Terms
Payment Schedule:
- Due date or payment schedule
- Payment amount
- Payment frequency
- Payment method
Common Structures:
- Lump sum on maturity date
- Monthly installments
- Interest-only with balloon payment
- Flexible repayment
5. Maturity Date
When Due:
- Specific due date
- Or "on demand"
- Extension provisions
- Early payment options
6. Collateral (If Secured)
Security:
- Description of collateral
- Valuation
- Perfection requirements
- Default remedies
7. Default Provisions
Default Events:
- Non-payment
- Breach of other terms
- Bankruptcy
- Death (if applicable)
Remedies:
- Acceleration of debt
- Collection actions
- Collateral seizure
- Legal action
8. Signatures
Execution:
- Borrower must sign
- Date of signing
- Witness (optional but recommended)
- Notarization (optional but adds formality)
Types of Promissory Notes
1. Simple Promissory Note
Characteristics:
- Basic terms only
- Fixed repayment date
- Simple interest
- Unsecured
Best For: Small personal loans, friend/family loans
2. Installment Promissory Note
Characteristics:
- Multiple payments
- Payment schedule
- Amortization
- Regular payments
Best For: Larger loans, structured repayment
3. Demand Promissory Note
Characteristics:
- Payable on demand
- No fixed due date
- Lender can request payment anytime
- More flexibility
Best For: Open-ended loans, lines of credit
4. Secured Promissory Note
Characteristics:
- Backed by collateral
- Security interest
- Lower risk for lender
- Collateral description
Best For: Larger loans, higher risk situations
5. Unsecured Promissory Note
Characteristics:
- No collateral
- Based on promise alone
- Higher risk for lender
- Simpler document
Best For: Trusted relationships, smaller amounts
Best Practices
1. Be Specific
Clear Terms:
- Exact amounts
- Specific dates
- Defined interest rates
- Clear payment schedule
2. Comply with Laws
Legal Requirements:
- Usury law compliance
- State-specific rules
- Tax considerations
- Proper execution
3. Include All Essential Terms
Don't Omit:
- Interest rate (even if 0%)
- Repayment terms
- Due date
- Default provisions
4. Get It Signed
Proper Execution:
- Both parties sign
- Date the document
- Consider witnesses
- Keep copies
5. Keep Records
Documentation:
- Original signed note
- Payment records
- Correspondence
- Modifications
Legal Considerations
Usury Laws
Interest Rate Limits:
- Vary by state
- Typically 8-12% for personal loans
- Higher for business loans
- Criminal penalties for violations
Exceptions:
- Business loans often exempt
- Credit cards different rules
- Check local regulations
Tax Implications
For Lenders:
- Interest income is taxable
- Minimum interest rates (AFR) for family loans
- Imputed interest rules
- Gift tax considerations
For Borrowers:
- Interest may be deductible (business loans)
- Personal loan interest generally not deductible
- Consult tax professional
Enforceability
Requirements:
- Must be in writing (for amounts over certain thresholds)
- Clear terms
- Proper execution
- Legal consideration
Statute of Limitations:
- Varies by state (typically 3-6 years)
- Written contracts longer than oral
- Starts from last payment or acknowledgment
Common Mistakes to Avoid
1. Verbal Agreements
Never:
- Lend without written note
- Rely on memory
- Skip documentation
- Assume terms are clear
2. Unclear Terms
Problems:
- Vague payment schedules
- Undefined interest rates
- Missing due dates
- Unclear default provisions
3. Ignoring Legal Requirements
Risks:
- Usury law violations
- Tax complications
- Unenforceable terms
- Legal penalties
4. Poor Documentation
Issues:
- Missing signatures
- Incomplete information
- Lost documents
- No payment records
Using Our Free Promissory Note Template
Creating a promissory note from scratch requires legal knowledge. Our free Promissory Note template provides:
- Legally Sound Structure: Based on promissory note best practices
- Essential Components: All required elements included
- Easy Customization: Fill-in-the-blank format
- Multiple Formats: DOCX and PDF downloads
- Time-Saving: Complete in minutes
- Professional Appearance: Ready for execution
Simply fill in loan amount, interest rate, repayment terms, and other details, and you'll have a professional promissory note ready to use.
Step-by-Step: Creating Your Promissory Note
- Gather Information: Collect all necessary details
- Choose Template: Use our Promissory Note template
- Identify Parties: Lender and borrower information
- Set Loan Terms: Amount, interest rate, term
- Define Repayment: Schedule and method
- Add Security: Collateral if applicable
- Specify Default: Events and remedies
- Legal Review: Have lawyer review for large loans
- Execute: Borrower signs, both parties keep copies
- Record Keeping: Maintain organized records
Special Situations
Family Loans
Additional Considerations:
- Gift tax implications
- Minimum interest rates (AFR)
- Relationship preservation
- Clear documentation even more important
Business Loans
Business-Specific:
- Corporate guarantees
- Business credit considerations
- Tax deductibility
- UCC-1 filings for security
Student Loans
Education Loans:
- Deferred payment options
- Interest rate considerations
- Co-signer requirements
- Repayment assistance programs
Frequently Asked Questions
What interest rate can I charge?
Interest rate limits vary by state (typically 8-12% for personal loans). Business loans often have different limits. Check your state's usury laws.
Do I need a lawyer for a promissory note?
For simple personal loans, a well-drafted template may suffice. For large amounts, business loans, or complex situations, consult a lawyer.
What happens if the borrower doesn't pay?
Your note should specify default remedies, which may include acceleration of debt, collection actions, and legal proceedings.
Can I change a promissory note after signing?
Modifications require written agreement from both parties. Create an addendum that both parties sign.
Is interest required on personal loans?
For tax purposes, the IRS requires minimum interest rates (AFR) for loans above certain amounts to avoid gift tax implications.
What's the difference between secured and unsecured notes?
Secured notes are backed by collateral that can be seized if the borrower defaults. Unsecured notes rely solely on the borrower's promise to repay.
How long should I keep promissory note documents?
Keep documents for the duration of the loan plus several years (typically 3-7 years) for legal and tax purposes.
Conclusion
A well-drafted promissory note is essential for protecting both lenders and borrowers. By including all essential components, complying with legal requirements, and following best practices, you can create notes that prevent disputes and provide legal protection.
Remember, while templates provide a solid foundation, always customize your note for specific situations and consult with legal and tax professionals for large or complex loans. Our free Promissory Note template offers an excellent starting point that you can tailor to your needs.
Protect your money and relationships today with a comprehensive, legally sound promissory note.
