What makes a promissory note invalid?

A promissory note may be invalid if: It lacks essential elements like the amount owed, the interest rate, and the repayment terms; Either party signed it under duress (i.e., someone was threatened or forced to sign it); It involves illegal activity (i.e., loan sharking or money laundering); It's forged or fraudulently altered.

Free Promissory Note Template

A promissory note records all the terms and conditions of a loan transaction between a borrower and a lender before any money changes hands.

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Table of Contents

By State
By Type (2)
What Is a Promissory Note?
When Should I Use a Promissory Note?
How to Write a Promissory Note
Usury Limits by State
Promissory Note Sample
Frequently Asked Questions

By Type (2)

Secured

A document used to include collateral in a high-stakes loan.

Unsecured

A document used for quick loans with trustworthy borrowers.

What Is a Promissory Note?

A promissory note is a written promise by a borrower to repay a loan to a lender according to predetermined terms and conditions.

Before the lender provides the requested funds, the lender and borrower should agree upon the loan’s terms, such as the loan repayment schedule, interest rates, and collaterals. Once they agree, they can document the terms accordingly.

After signing the note, the borrower receives the amount promised by the lender and pays back the loan according to the terms. Eventually, the lender will release the borrower from the promissory note once the loan is completely paid off.

Some promissory notes are negotiable, meaning the original payee can transfer the note to another party. However, not all promissory notes are negotiable.

When Should I Use a Promissory Note?

Common scenarios in which you may use a promissory note can include:

Informal loans: Lending money to friends or family members via personal loans.
Real estate loans: Providing a private mortgage to a home buyer.
Business loans: Financing a business for start-up or expansion.
Vehicle loans: Funding for the purchase of a car, boat, or other motor vehicle.

Purchase of a Vehicle or Other Item with Financing

Bill of Sale: This document transfers ownership of the vehicle or item from the seller to the buyer.
Promissory Note: This document outlines the buyer’s promise to pay the seller (or a financing institution) a specific amount of money over a specified period.

Promissory notes are typically for less complex loans or when there is a prior acquaintance between the lender and the borrower. By using promissory notes, lenders ensure legal protection for themselves in the event of a borrower’s failure to return the borrowed money.

How to Write a Promissory Note

Step 1 – State the Parties

Identify the borrower (the party receiving the loan) and the lender (the party who will be paid back). The parties can be individuals or business entities, such as corporations or LLCs. If either party to the promissory note is a business entity, a representative must sign on its behalf.

If the borrower’s financial stability is questionable, the lender may demand a cosigner with good credit as a safety net for the promissory note.

Consider requesting your borrowers to supply their credit reports for loans.

Borrowers can access these free yearly reports online through websites like AnnualCreditReport.com or credit card company perks. Some online agencies also offer paid financial status checks.

Step 2 – Outline Repayment Terms

Next, you should clearly outline the following details about the loan and how the borrower will pay it back:

Principal amount: The total amount of money borrowed;
Repayment schedule: How the borrower plans to pay, whether it’s in installments, a lump sum payment, or on demand;
Due date: The day when the lender can expect the borrower to make their final payment;
Security or collateral: Whether the borrower needs to guarantee the loan with their asset(s) and secure the note;
Late fee: Whether there will be an additional fee if the borrower fails to pay on time;
Accrued interest: The interest rate the lender will add to the unpaid principal (in compliance with usury limits);
Acceleration: Whether the lender can ask for the whole loan to be paid back at once, regardless of the original payment plan;
Prepayment: Whether the borrower can pay back the loan early without any extra charges;
Default provisions: The consequences if the borrower can’t fulfill their end of the loan agreement;
Guarantors: People who promise to repay the loan if the borrower defaults.

When determining repayment terms and writing the entire agreement, the lender should consider carefully the borrower’s financial condition and the risks associated with the loan. For example, if your borrower has low credit, you may opt for a secured promissory note if the borrower defaults.

Step 3 – Consider Additional Terms

Before you complete the promissory note, consider including additional provisions to make your note more comprehensive, such as:

Amendment: How the parties can alter the note;
Governing law: Which state laws will apply to the note;
Joint and several liability: How all co-borrowers share responsibility for the repayment of the note, collectively and individually;
Right to transfer: Whether the lender has the right to transfer the promissory note to a different party.

Step 4 – Sign the Note

After both the borrower and lender agree to the note’s terms, all parties, including the guarantors if there are any in the arrangement, should sign the note.

Although it’s not legally required, you may consider getting the promissory note notarized if the loan involves a significant amount of money or the terms are complex.

Please only exchange money after the parties sign the note. Furthermore, every party to the note should receive a copy, and the lender should store the original securely.

A copy will suffice if you lose the original. If neither the original nor a copy is present, you may find other ways to prove the agreement’s existence (such as a text exchange). Be aware that the borrower may not have an obligation to repay if there’s no proof that the loan occurred.

Step 5 – Enforce the Note

Generally, there are three potential outcomes once a promissory note is in effect:

Timely repayment

Suppose the borrower pays the total amount per the note’s conditions. In that case, the lender should provide a loan release form to relieve the borrower of any further obligations related to the note.

Delayed repayment

In case of late payment, the lender must issue a demand letter requesting the full payment and any applicable late fees. If the borrower still fails to make up for the payment, the lender must evaluate the financial viability of initiating legal action.

Non-repayment

If the borrower completely defaults on payment, you can enforce it by reminding them of their obligation. If the borrower doesn’t respond or refuses to pay, you can recruit outside help.

For example: John lends $5,000 to his friend Mark, who signs a promissory note agreeing to repay the amount within six months. However, after the deadline passes, Mark fails to repay the loan. John attempts to contact Mark, but after several unsuccessful attempts, he decides to take legal action.

John presents the signed promissory note to the court as evidence of the debt agreement. Because the note includes all the required elements, such as the amount, interest rate, and repayment terms, the court rules in John’s favor, ordering Mark to repay the loan plus any accrued interest.

The lender can pursue repayment (and collateral repossession, if applicable) via small claims court (a less expensive venue that doesn’t permit attorney representation, thereby eliminating attorney’s fees) for loans under the state limit. Litigation may be necessary if the loan exceeds the lender’s state limit.

Usury Limits by State

Usury is the illegal practice of setting the interest rate on debt (including all extra charges like fees and discount points) higher than the maximum limit set by the relevant law or beyond what’s allowed in an exception to the law. Therefore, usury rates refer to the practice of charging excessively high-interest rates on loans, often exceeding legal limits.

To prevent it, each state has different legislation aimed at limiting the annual percentage rate (APR) a payday lender can charge, depending on the size of the loan, who is making the loan, and loan type.

For example: Sarah, a single mother, faces a financial crisis when her car breaks down, jeopardizing her job and her ability to care for her children. Seeking help, she turns to a recommended private lender who agrees to lend her $2,000 for repairs but imposes an exorbitant 25% monthly interest rate.

Despite struggling to keep up with payments due to the high rate, Sarah is unaware that her state’s usury laws cap interest rates at 10% per month. The lender’s exploitation of her desperate situation violates these laws, plunging Sarah deeper into debt and perpetuating her financial hardship.

In the absence of federal regulation around usury interest rates, each state has its own process for determining the rate, and they may use the following as a baseline:

short-term or long-term Treasury Bill rates
the U.S. prime rate
fixed rates
agreed-upon rates

* This table only includes maximum interests rates (usury limits) applicable to private loans.

State	Maximum Annual Rate	Additional Notes	Law
Alabama	6%; 8% if agreed upon in writing	Excluding loans over $2,000	Ala. Code § 8-8-1
Alaska	Federal funds rate + 5%; 10.5% if no contract	Excluding loans over $25,000	Alaska Stat. § 45.45.010
Arizona	10%; no limit if agreed and contracted upon		Ariz. Rev. Stat. § 44-1201
Arkansas	Federal discount rate + 5% (capped at 17%)	Capped at 17%	Ark. Const. Art. XIX § 13
California	7%; 12% if agreed upon		Cal. Const. Article XV § 1 and Cal. Civ. Code § 1916.1
Colorado	8%; 45% if agreed and contracted upon		Colo. Rev. Stat. § 5-12-101 and § 5-12-103
Connecticut	12%		Conn. Gen. Stat. § 37-4
Delaware	Federal discount rate + 5%		Del. Code tit. 6, § 2301
District of Columbia	6%; 24% if by contract in writing		DC Code § 28-3301 and § 28-3302
Florida	Average of the Federal discount rate for the preceding year + 5%		Flo. Stat. § 687.01 and § 687.03
Georgia	7%; 16% if contracted in writing and loan is less than $3,000	No limit if loan is between $3,000 and $250,000	Ga. Code § 7-4-2 and § 7-4-18
Hawaii	10%		Haw. Rev. Stat. § 478-2
Idaho	12% unless agreed and contracted upon		Idaho Code § 28-22-104
Illinois	9%		815 ILCS 205/4
Indiana	25%		Ind. Code § 24-4.5-3-201
Iowa	5%; capped at the official usury rate if agreed upon in writing		Iowa Code § 535.2(3)(a)
Kansas	10%; 15% if agreed upon		Kan. Stat. § 16-201 and § 16-207
Kentucky	8%; 19% OR Federal discount rate + 4% (whichever is lower) if agreed upon	No limit if loan is > $15,000	Ky. Rev. Stat. § 360.010
Louisiana	12%		La. Stat. tit. 9 § 3500
Maine	6%; no limit if agreed upon		Me. Stat. tit. 9-B § 432
Maryland	6%; 8% if agreed upon in writing		Md. Code, Com. § 12-102 and § 12-103
Massachusetts	6%; 20% if agreed upon		Mass. Gen. Law Ch. 107, § 3
Michigan	5%; 7% if agreed upon in writing		Mich. Comp. Laws § 438.31
Minnesota	6%; 8% if agreed upon in writing	No limit if loan is > $100,000	Minn. Stat. § 334.01
Mississippi	8%; 10% OR Federal discount rate + 5% (whichever is greater) if agreed upon		Miss. Code Ann. § 75-17-1
Missouri	9%; 10% OR market rate (whichever is greater) if agreed upon	Only applies to first mortgages made by lenders that are not insured bank, savings and loan, or credit union, or any who have made $1 million in real estate loans in the past year.	Mo. Rev. Stat. § 408.030
Montana	6% + federal funds rate; 15% if agreed upon in writing		Mont. Code Ann. § 31-1-107
Nebraska	6%; 16% if agreed upon in writing		Neb. Rev. Stat. § 45-101.03
Nevada	Prime rate of NV's largest bank + 2%; no limit if agreed upon		Nev. Rev. Stat. § 99.040
New Hampshire	10%; no limit if agreed upon		NH Rev. Stat. § 336:1
New Jersey	6%; 16% if agreed upon in writing	- No limit if loan > $50,000 - Interest rates exceeding 30% for loans to individuals (50% for businesses) are considered criminal usury	NJ Stat. § 31:1-1
New Mexico	15%; no limit if agreed upon		NM Stat. § 56-8-3
New York	16%	Interest rate exceeding 25% for loans are considered criminal usury	NY Gen. Oblig. § 5-501
North Carolina	8%; no limit if agreed upon OR if the loan is greater than $25,000		NC Gen. Stat. § 24-1.1
North Dakota	6%; average interest on treasury bills + 5.5% if agreed upon in writing	[average interest on treasury bills + 5.5%] must be greater than 7%	ND Cent. Code § 47-14-09
Ohio	8%	No limit if loan > $100,000	Ohio Rev. Code § 1343.01
Oklahoma	6%; no limit if agreed upon		Okla. Stat. tit. 15, § 266
Oregon	9%; no limit if agreed upon		ORS § 82.010
Pennsylvania	6%	No limit if business loan > $10,000 or unsecured notes with loan > $35,000	41 Pa. Stat. § 201
Rhode Island	12%; 21% if agreed upon		RI Gen. Law § 6-26-2
South Carolina	12%		SC Code Ann. § 37-3-201
South Dakota	12%; no limit if agreed upon		SD Codified Laws § 54-3-1.1 and § 54-3-4
Tennessee	10%	Usury rates do not apply for loans under $1,000	Tenn. Code § 47-14-103
Texas	6%; 10% if agreed upon		Tex. Fin. Code § 302.001(b)
Utah	10%; no limit if agreed upon		Utah Code § 15-1-1
Vermont	12%		Vt. Stat. tit. 9, § 41a
Virginia	6%; 12% if agreed and contracted upon		Va. Code Ann. § 6.2-301
Washington	12% OR average interest on treasury bills + 4%, whichever is greater		Wash. Rev. Code § 19.52.020
West Virginia	6%; 8% if agreed and contracted upon		W. Va. Code § 47-6-5
Wisconsin	5%; no limit if agreed upon		Wis. Stat. § 138.04
Wyoming	7%; no limit if agreed upon		Wyo. Stat. § 40-14-106

Promissory Note Sample

Download a free promissory note template as a PDF or Word file below:

promissory note template

Frequently Asked Questions

A promissory note may be invalid if:

It lacks essential elements like the amount owed, the interest rate, and the repayment terms;
Either party signed it under duress (i.e., someone was threatened or forced to sign it);
It involves illegal activity (i.e., loan sharking or money laundering);
It’s forged or fraudulently altered.

Typically, promissory notes are not recorded with the county; the lender simply retains them in their records. Some jurisdictions may require the parties to record promissory notes if they involve real estate.

Yes, you can sign a promissory note electronically. The E-Sign Act upholds the validity of online signatures. However, you must ensure the process follows all relevant laws and standards in your jurisdiction.

A promissory note can last three to 15 years, depending on the jurisdiction. Its statute of limitation is generally the same as that of other written agreements.

However, this period may extend to 15 to 30 years for real estate-related notes.

The lender can file legal action to retrieve the loan’s outstanding balance and any owed fees or interest. The lender may also recover costs associated with the lawsuit, such as attorney’s fees.

Yes. A promissory note is legally binding whether the borrower supports it with collateral or simply the promise to repay.

Promissory Note Template

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