Table of Contents
- Download a Promissory Note Template
- The Definition: What is a Promissory Note?
- The 4 Types of Promissory Notes (Repayment Options)
- When Should You Use One?
- The Consequences of Not Having One
- What Should be Included in a Promissory Note
1. Download a Promissory Note Template
Looking for a specific type of promissory note? Browse our options here.
2. The Definition: What is a Promissory Note?
This is a written document that officially recognizes a legally binding relationship between two parties — a lender and a borrower. True to its name, it serves as a written and enforceable promise to pay a certain amount of money owed. Both parties understand that money is being borrowed and will be repaid at a future date.
Promissory notes can be either secured or unsecured, the differences of which are highlighted below.
- Secured – The borrower has agreed to surrender their property as collateral if they fail to pay back the principal loan. This means that if you have lent money through a secured note, you have the legal right to take their property. This property can be either tangible (jewelry, cars, computers, etc.) or intangible (business, stocks, copyrights, patents, etc.).
- Unsecured – An unsecured note features higher interest rates, which is favorable to the lender — but it also comes with risks. Retrieving money lent through an unsecured note can become a huge time waster, as well as a financial and emotional burden.
For more information, check out the related resources:
- How to Enforce a Promissory Note
- What’s the difference between an IOU, a Promissory Note and a Loan Agreement?
Promissory Note PDF Sample
The sample promissory note below details an agreement between the borrower, “Jonathan M Hunt,” and the lender, “Erika T Haynes.” Jonathan M Hunt agrees to pay the principal amount of $1,000 USD to Erika T Haynes under the terms specified.Promissory Note
People also refer to this document by other names:
- Negotiable Instrument (can be sold and used in business transactions)
- Commercial Papers (provide capital — aka money — to businesses)
- Bank Note (in financial institutions)
- Mortgage Notes (in real estate)
- Note Payable Form (in accounting)
- Private or Personal Loan
- Intra-Family Loan
- Promise to Pay
- Demand Note
3. The 4 Types of Promissory Notes (Repayment Options)
There are generally four types of promissory notes, or repayment options. Choose the template that makes the most sense for your situation. You can download a blank promissory note below for free or create one using our state-of-the-art legal template builder.
- Installment Payments – Installment payments are frequently used to buy expensive items like cars, boats, and appliances. Usually, the payments are made in equal monthly amounts, including interest, until the principal balance (the total amount borrowed) has been repaid. Borrowers can place a down payment on the installment loan to reduce the total amount of interest paid, if they can afford to do so.
- Installment Payments with a Final Balloon Payment – Balloon payments are frequently used in mortgage loans, and typically used by short-term borrowers because they feature lower interest rates than longer-term loans. Essentially, the borrower agrees to pay a low interest rate for a short amount of time, for example five years, and pays back only a fraction of the principal balance in that time. At the end of the term, the borrower has the option to reset the loan (potentially at a higher interest rate) or pay off the massive remaining balance (the balloon), if they can afford it.
- Due on a Specific Date – For smaller loan amounts, borrowers and lenders can agree to a specific payback date. Lenders will know exactly when they will be paid back, and borrowers will not have to worry about monthly payments. Instead, the borrower repays the entire amount of the loan — the principal plus any interest — on a specific date.
- Due on Demand – Due on demand notes are usually used for loans between family and friends. As there are no specific payment terms, these loans are sometimes called open-ended loans. Borrowers can pay back the note when they are financially stable. And lenders can be assured they will have an income source if necessary. If a note does not have any payment terms, it will be considered a due on demand note.
We provide three different promissory note templates in our builder, each featuring a different type of loan stipulating the borrower’s payment and prepayment options. If you want to “secure” your note, make sure you detail the type and amount of collateral that will be offered if the loan is not paid.
4. When Should You Use One?
Promissory notes may be appropriate for a variety of situations. Here are some scenarios where you may need to use one:
I should use a note if I…
- need to borrow money from an individual or company for a large purchase such as a car
- plan to loan money to an individual or a business
- need to take out a student loan (known as a master promissory note)
- have to borrow money to for my business
- can’t get a mortgage approved by the bank because I am self-employed
- want something more formal than an IOU form
- want something more flexible than a loan agreement
Why Not Just Get a Loan from the Bank?
A note is an alternative to a conventional bank loan. The traditional lender is a bank, the usual borrower has excellent credit, and the normal collateral is a home or other piece of real estate.
In contrast, this document allows anyone to be a lender, the borrower does not have to consider their credit score, and the collateral could be any object from fine jewelry to a fur coat.
Instead of relying on a third party institution like a bank during a difficult borrowing environment, lenders and borrowers can directly negotiate with one another and think of creative solutions. Lenders have the flexibility to arrange a unique set of repayment options and create their own “micro-loans” with whomever they prefer.
Similarly, borrowers with less-than-stellar credit benefit from non-traditional lending instruments like a note. Although unable to qualify for a traditional mortgage or line of credit from the bank, a borrower can use this document to slowly get on back on the path of good credit, own a car, become a homeowner, or start a business.
5. The Consequences of Not Having One
The consequences of not having a valid promissory note may be severe. The following is a chart of the suffering that this document can help prevent:
Preventable Suffering: Lenders vs. Borrowers
|Borrowed money unpaid||Unpaid bills|
|Loss in value of used house or car||Paid for a house or car with no proof|
|Pay the IRS a gift tax of up to 40%||Pay the IRS income tax on the "gift"|
|Expensive lawyer fees to:|
1. recover damage to property
2. battle alleged ownership
3. pursue debt collection
|Expensive lawyer fees to:
1. obtain the deed to a house
2. obtain the title to a car
3. fight debt collectors
|Loss of friendship or family trust||Loss of friendship or family trust|
|Personal safety and well-being||Personal safety and well-being|
6. What Should be Included in a Promissory Note
A simple note in writing should answer six basic questions:
1. Who is on the hook? (the “borrower” and the “lender”)
The 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 note, but it is good practice to also have the lender’s signature. Always consult your local and state laws to verify signature and witness requirements.
2. How much needs to be paid back? (“principal” and “interest”)
More sophisticated than an IOU, a 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 or amount is often charged on top of the principal. Otherwise, the lender is actually “losing” money by not charging interest and keeping the present value of money in hand.
If you are unsure of how much interest rate to charge on a personal loan, visit the Wells Fargo Rate and Payment Calculator, the Prosper Loans, or the Lending Club’s rates for a comparison of current interest rates for personal loans. Amortization calculators are also available if you want to calculate the breakdown of principal and interest payments on a monthly basis for the lifetime of the loan.
3. How will the money be repaid?
The 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|
4. When do I have to pay back the money? (the “maturity date”)
Depending on how the note is structured, the borrower must pay back the lender by a certain date. If there is no date or if the date has already past, it is “payable on demand” or “due on demand.”
5. What happens if the money is not paid back? (“default” and “collection”)
A promissory note does not guarantee that the lender will be repaid, but a written note will be 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 note for collection. The borrower would be responsible for paying any reasonable costs associated with collection, including attorneys’ fees.
A professional collection agency will charge the lender either a flat fee or a percentage of the outstanding debt, so it can sometimes be in the lender’s interest to negotiate a debt settlement agreement with the borrower and accept less than the original amount owed.
6. What other details should be included?
A note may include these additional provisions:
- Acceleration: can the lender ask the borrower to pay back asap?
- Possible events of acceleration
- 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 sales of a large or material portion of their assets?
- Possible events of acceleration
- Amendment: any changes to the note must be in writing
- Collateral: if the borrower defaults, the lender can keep the 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 note to a different party