A California promissory note is a crucial legal instrument in formalizing a loan agreement between a lender and a borrower. It serves as a written commitment from the borrower to repay a specified sum within a defined timeframe. While it does not outline the consequences of complete default, the lender retains the option to pursue legal action if the borrower fails to pay on time or refuses to make payments.
The state’s legal landscape emphasizes consumer protection; therefore, these types of documents may include additional provisions to safeguard borrowers’ rights, such as disclosures regarding their rights and obligations, as well as provisions addressing prepayment penalties, acceleration clauses, and non-recourse language.
Laws: Governed by the California Civil Code, promissory notes in California must be in writing and adhere to specific requirements to ensure their legality and enforceability (§ 1624).
Statute of Limitations: Four years if based on a contract (CCP § 337). Six years if the document is a negotiable instrument (COM §3118(a)).
Usury Laws and Interest Rates
Promissory notes must comply with the state’s usury laws as detailed in CONS Article XV.
- Contracts For The Sale of Goods For Personal, Family, or Household Purposes (CONS Article XV (1)): No more than 10% per annum.
- For Any Other Type of Contract (CONS Article XV (2)): No more than 10% per annum or no more than 5% plus the prevailing rate of the Federal Reserve Bank of San Francisco’s discount rate, whichever is higher.
- For Money Judgment (CCP § 685.010): 10% per annum on the principal amount of the judgment.
- For Judgment for Damages Against A Public Entity (CIV § 3287(c)): At a rate equal to the weekly average one year Treasury Yield but not more than 7% per annum.
- For Pawn Brokers (CIV § 21200): Not more than 3% per month on the unpaid principal of the loan.
