Table of Contents
- Free Promissory Note Template & Example (PDF & Word)
- What is a Promissory Note?
- When to Use a Promissory Note
- How to Write a Promissory Note: Promissory Note Format
1. Free Promissory Note Template & Example (PDF & Word)
Free Printable Promissory Note Sample (PDF)
The simple promissory note sample letter below details an agreement between the borrower, “Jonathan M. Hunt,” and the lender, “Erika T. Haynes.” Mr. Hunt promises to pay the principal amount of $1,000 USD to Ms. Haynes under the terms specified.Promissory Note
2. What is a Promissory Note?
A promissory note recognizes a legally binding relationship between two parties — a lender and a borrower. True to its name, it serves as a written and enforceable agreement that the borrower promises to pay the lender a sum of money within a specified period of time.
Types of Promissory Notes:
Secured Promissory Note: The borrower has agreed to surrender their property as collateral if they fail to pay back the principal loan during the specified time. Using a secured promissory note means that you have a legal right to the borrower’s tangible property (jewelry, cars, computers, etc.) and intangible property (business, stocks, copyrights, patents, etc.).
Unsecured Promissory Note: The lender is not allowed to secure the borrower’s assets if the loan is not repaid. An unsecured promissory note features higher interest rates, which are favorable to the lender. However, if the borrower does not make the agreed payments, the lender can (and should) take legal action, such as filing a suit in small claims court.
People also refer to promissory notes by other names:
- Loan Agreement
- Real Estate Promissory Note
- Personal Loan Agreement
- Commercial Paper
- Mortgage Note
- Family Loan Agreement
- Promise to Pay Letter / Agreement / Contract
- Demand Note
- Notes Finance
- Debt note
- Loan note
3. When to Use a Promissory Note
If you’re borrowing or lending money, and want to create a private yet enforceable agreement that addresses payment details, interest rates, collateral, and late fees, use a:
- Student loan, real estate, or mortgage promissory note
- Promissory note for car purchase
- Promissory note for business funding
- Promissory note for personal loans between friends and family members
4. How to Write a Promissory Note: Promissory Note Format
A legal promissory note should answer seven basic questions:
1. Who is on the hook? (the “borrower” and the “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 is good practice to also include the lender’s signature.
2. Does a promissory note need to be notarized?
Typically, a promissory note does not need to be notarized. However, always consult your local and state laws to verify signature and witness requirements.
3. How much needs to be paid back? (“principal” and “interest”)
Even a simple promissory note should clearly state the amount of money being borrowed (the “principal” amount).
Since $1 is worth more today than $1 tomorrow (i.e., the time value of money or TVM), an interest rate it is often charged on top of the principal. Otherwise, the lender is “losing” money by keeping the present value of money in hand.
If you are unsure of what interest rate to charge, visit the Wells Fargo Rate and Payment Calculator, the 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 that 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, for amounts less than $500,000, can incur an interest rate of 18%, and loans greater than $500,000 can be subject to a rate of 45%. Make sure you check the interest requirements in your state before drafting your loan notes.
4. How will the money be repaid?
The promissory note should clearly spell out how the money will be paid back to the lender. For 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. When do I have to pay back the money? (the “maturity date”)
Depending on how the promise to pay letter is structured, the borrower must pay back the lender by a certain date. If there is no date or if the date has already passed, it is “payable on demand” or “due on demand.”
6. What happens if the money is not paid back? (promissory note “default” and “collection”)
A promissory note does not guarantee that the lender will be repaid, but a written promise to pay agreement is strong evidence if you need to appear before a judge. If the borrower is unable to pay back the money and defaults on the note, the lender can place the debt note for collection.
The borrower would also be responsible for paying any reasonable costs associated with the collection of debts, including attorney fees.
A professional collection agency will charge the lender either a flat fee or a percentage of the outstanding debt, so 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.
7. What other details should be included?
A promise to pay contract 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, make sure to administer a copy of the signed promissory note to all involved parties, and then file the original in a secure location. Or you can skip the hard work by using our Promissory Note builder.