A promissory note is a written and enforceable agreement in which a borrower promises to pay a lender a sum of money on demand, or within a specified period of time. The note records information about how much was lent (the principal amount), interest rates, when the payment is due (maturity date), when and where it was issued, and signatures.
A promissory note is also referred to as a:
- Debt Note
- Demand Note
- Commercial Paper
- Notes Payable
1. Free Promissory Note Form
Download a free promissory note template below. You can choose to make it either secured, or unsecured:
- Secured Promissory Note: Use this document if you want the borrower to agree to give up property (like jewelry, cars, businesses, or stocks) if they fail to pay back the loan.
- Unsecured Promissory Note: Use this document if you don’t want the borrower to agree to give up property if they fail to pay back the loan. Lenders will often demand higher interest rates in return.
__________ Dated:_________ FOR VALUE RECEIVED, the undersigned, __________ (“Borrower”), hereby promises to pay to the order of __________ (“Lender”), the principal sum of __________ (the “Principal Amount”) in accordance with the terms set forth below. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first stated above. SIGNATURES ___________________ Borrower Signature ___________________ Borrower Full Name
FOR VALUE RECEIVED, the undersigned, __________ (“Borrower”), hereby promises to pay to the order of __________ (“Lender”), the principal sum of __________ (the “Principal Amount”) in accordance with the terms set forth below.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first stated above.
Borrower Full Name
If you’re borrowing or lending money, you should create a promissory note that addresses payment details, interest rates, collateral, and late fees. There are many types of promissory notes that can be used for several purposes, such as:
- Personal loans between family members, friends, and colleagues
- Student loans
- Real estate loans, property down payments, or mortgages
- Automobile, vehicle, or car loans
- Bank, commercial, business, or investment loans
In general, you should use a promissory note for more straightforward loans with basic repayment structures, and a loan agreement for more complex loans.
3. How to Write a Promissory Note: Promissory Note Format
A legal promissory note should contain the following details and clauses:
1. Full names of parties (“borrower” and “lender”)
A standard promissory note should name who is receiving money or a line of credit (the “borrower”) and who will be repaid (the “lender”). Only the borrower must sign the promissory note, but it’s good practice to also include the lender’s signature.
- The lender may also be called a “payee”, “seller”, “issuer”, or “maker”.
- The borrower may also be called a “payer” or “buyer”.
2. Repayment amount (“principal” and “interest”)
All promissory notes, no matter how simple, should clearly state the amount of money being borrowed (the “principal” amount) that needs to be paid back. You also need to decide whether or not to charge interest, and how often it will be compounded (monthly or yearly).
If you’re unsure what interest rate to charge, visit the Wells Fargo Rate and Payment Calculator, Prosper Loans, or the Lending Club for a comparison of current interest rates for personal loans. You can use any of their promissory note amortization calculators to calculate the principal and interest payments on a monthly basis for the lifetime of the loan. Note: the majority of states have usury laws that restrict the interest rate you can charge.
For example, in California and Texas, a promissory note’s interest rate cannot exceed 10%. In comparison, Florida promissory notes can incur an interest rate of 18% (for amounts less than $500,000), or 45% (for loans greater than $500,000). Make sure you check the interest requirements in your state before drafting your loan notes.
Payments on the note are usually applied first toward the interest with the remainder applied toward the principal amount.
4. Payment plan
The promissory note should clearly spell out how the money will be paid back to the lender. For instance, depending on how the promissory note is structured, the borrower must pay back the lender by a certain date (known as a “maturity date”). If there is no date or if the date has already passed, it is “payable on demand” or “due on demand.” For all of the repayment options, refer to the table below.
Four Types of Repayment Options
|Installments with Final|
|Due on Specific Date|
|Due on Demand
(“Payable on Demand”)
|Specific due date||Specific due date||Specific due date||No specific due date|
|Payments for principal and interest are made at regular intervals||Payments for interest only are made at regular intervals, principal amount due on maturity date||Entire amount owed, including interest, is paid all at once||Entire amount owed is due whenever the lender wants his or her money back|
|Example: $1,500 monthly payment actually consists of $500 towards the outstanding principal and $1,000 towards the interest with $1,500 due on the maturity date||Example: $500 monthly payment is applied only towards interest and full $10,000 loan amount is due on the maturity date||Example: $10,000 loan for a friend’s small business is due on a specific date||Example: $10,000 loan for a friend's small business is due at any time or whenever financially feasible|
5. Consequences of non-payment (“default” and “collection”)
If the borrower is unable to pay back the money on time and defaults on the note, the lender can enforce the promissory note and demand the full amount be paid, or collect on the collateral. If the borrower refuses to pay, the promissory note provides strong evidence if the lender wishes initiate legal action. In the event that the borrower loses the lawsuit, they would also be responsible for paying any reasonable costs associated with the collection of debts, including attorney fees.
In the event that a borrower enlists a professional collection agency, they’ll be charged either a flat fee or a percentage of the outstanding debt. As a result, it’s sometimes in the lender’s interest to negotiate a debt settlement agreement with the borrower, and accept less than the original amount owed.
6. Notarization (if necessary)
Typically, a promissory note does not need to be notarized. However, always consult your local and state laws to verify signature and witness requirements.
7. Other common details
A promissory note may include these additional provisions:
- Acceleration: can the lender demand immediate payment from the borrower?
- Possible events of acceleration include:
- if the borrower becomes bankrupt
- if the borrower fails to make payments
- if the borrower passes away (i.e., death)
- if the borrower wants to pay off the note early
- if the borrower sells of a large or material portion of their assets
- Possible events of acceleration include:
- Amendment: any changes made to the note (must be done in writing)
- Collateral: if the borrower defaults, the lender can keep the designated collateral property
- Governing Law: which state’s laws apply
- Joint and Several Liability: all co-borrowers share responsibility
- Late Charges: a penalty is charged if the amount is paid back late
- Prepayment: the borrower can pay off the debt and interest early
- Right to Transfer: the lender can transfer the promissory letter to a different party
Once you’ve ironed out the details, give a copy of the signed promissory note to all involved parties, and then file the original in a secure location.