An Unsecured Promissory Note outlines the borrower’s obligation to repay a loan without pledging any collateral. It is typically used for smaller loans or loans between trusted parties, such as friends and family.
Tip
If you are lending over $100,000 or to someone who isn’t a close family or friend, consider using a secured promissory note.
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What Is an Unsecured Promissory Note?
An unsecured promissory note is a loan document where the borrower is not required to provide collateral, such as assets or property, for the loan. This limits the lender’s ability to collect the loan balance if the borrower fails to pay, as recovering the loan can be difficult if the borrower defaults.
When to Use One
Due to the risks associated with lending with an unsecured promissory note, lenders should use one only when:
- The borrower is a close friend or family member with a strong credit score, or
- The loan is for a relatively small amount of money. Among our survey with promissory note users in 2022, 76% of them with a principal amount less than $100,000 chose NOT to secure their promissory note with collateral.
Examples of unsecured promissory notes include personal loans, credit card debt, and student loans without any collateral attached.
How to Write an Unsecured Promissory Note
Step 1: Establish Trust
Check the borrower’s background if you don’t have a strong relationship with the borrower. You can ask the borrower to apply for a credit report check and give it to you for approval. If their credit score is below average, you may want to reconsider loaning to them.
If the borrower is a close friend or family, tell them that although you trust them, you need concrete proof that they can pay you back. Remind them that this is a loan rather than a gift, and you eventually need the money back.
Step 2: Minimize Your Risks
Next, minimize risks by setting reasonable interest rates. Unsecured promissory notes tend to have higher rates as they possess higher risks; however, your rates should not exceed the maximum limit in your state.
On top of interest rates, you should also consider what kind of payment schedule to apply. Paying in installments is generally safer than lump sum payments since installments are much smaller and easier to pay.
Step 3: Outline the Terms
The note should specify the following aspects:
- Principal amount. The total sum of money lent.
- Repayment Structure. Clarify whether repayment will be in installments, a lump sum, or on demand.
- Penalties for Late Payment. Indicate if an extra fee applies for late payments.
- Prepayment Terms. Indicate if the borrower can pay off the loan early without incurring additional charges.
- Acceleration Clause. Define whether the lender has the right to demand full repayment at once, regardless of the initially agreed schedule.
- Default Consequences. State the consequences of non-repayment.
Ensure a thorough review of the note once all terms are set. Neglecting to include any essential terms might impact the note’s enforceability.
Step 4: Sign, Exchange Funds & Store Note Securely
You and the borrower will sign the unsecured promissory note before exchanging funds.
Both parties should scan the note and store the note securely — such as in a private cloud drive or safe deposit box — until the loan is paid off and the borrower is released from the note. This protects both parties in case there are false claims regarding repayment.
Unsecured Promissory Note Sample
Kickstart your writing process by using our free PDF and Word template below.
UNSECURED PROMISSORY NOTE
State of ___________
Amount: $________ [Principal amount]
Dated: ___________, 20___
FOR VALUE RECEIVED, the undersigned _____________________________ [Name of borrower(s)], (collectively “Borrower”), hereby promises to pay to the order of _____________________________ [Name of lender(s)], (collectively “Lender”), the principal sum of $________ (the “Principal Amount”) including interest in accordance with the terms set forth below.
1. Payment. The Principal Amount together with any accrued and unpaid interest and all other charges, costs and expenses, is due and payable on: (Check one)
☐ ___________, 20___.
☐ demand of the Lender.
All payments under this Note are applied first to any accrued interest and then to the Principal Amount.
2. Payment Schedule. (Check one)
☐ This Note shall be payable in installments equal to $________. The first payment is due on ___________, 20___ and due thereafter in equal consecutive installments every: (Check one)
☐ Month
☐ Quarter
☐ Year
☐ Other: ______________
☐ This Note shall NOT be payable in installments.
3. Interest. (Check one)
☐ The Principal Amount shall bear interest at the rate of $________ per annum, accruing daily. Notwithstanding, the total interest charged on the Principal Amount shall not exceed the maximum amount allowed by law and Borrower shall not be obligated to pay any interest in excess of such amount.
☐ The Principal Amount shall NOT bear interest.
4. Late Fee. (Check one)
☐ If Borrower fails to make a payment due under this Note within _____ days after the due date, Borrower agrees to pay to Lender a late payment fee of: (Check one)
☐ $________.
☐ ________% of the amount then due.
☐ A late payment fee will NOT be charged.
5. Acceleration. (Check one)
☐ In the event Borrower is more than _____ days late with a payment, Lender in its sole discretion may demand that the entire balance of the unpaid principal amount of this Note and any accrued and unpaid interest be immediately due and payable in full.
☐ This note will NOT be accelerated if a payment is late.
6. Prepayment. (Check one)
☐ Borrower has the right to prepay all or any part of the Principal Amount of this Note at any time without prepayment penalty or premium of any kind. Borrower must provide _____ days prior written notice to Lender of the prepayment and the amount of the prepayment. ( ☐ If Borrower pays all of the Principal Amount, together with any accrued interest, on or before ___________, 20___, Lender will give a discount of $________ of the outstanding Principal Amount due.)
☐ Borrower may NOT prepay the note.
7. Costs and Fees. Upon the occurrence of a default by Borrower, Borrower shall pay to Lender all costs of collection, including reasonable attorney’s fees.
8. Waiver. Borrower and all sureties, guarantors and endorsers hereof, waive presentment, protest and demand, notice of protest, demand and dishonor and nonpayment of this Note.
9. Guaranty. ______________ located at __________, __________, __________ __________ (“Guarantor”) promises to unconditionally guarantee to Lender, the full payment and performance by Borrower of all duties and obligations arising under this Note. Guarantor agrees that this guaranty shall remain in full force and effect and be binding on Guarantor until this Note is satisfied.
10. Assignment. Borrower may not assign its rights or delegate its duties under this Note without Lender’s prior written consent.
11. Joint and Several Liability. The obligation of each Borrower under this Note shall be joint and several.
12. Amendment. This Note may be amended or modified only by a written agreement signed by Borrower and Lender.
13. Notifications. Any notice or communication under this Note must be in writing and either personally delivered, sent by overnight courier service, certified or registered mail, postage prepaid, return receipt requested or by facsimile or electronic email transmission.
14. Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of ____________.
15. Miscellaneous. This Note will inure to the benefit of and be binding on the respective successors and permitted assigns of Lender and Borrower. Lender shall not be deemed to have waived any provision of this Note or the exercise of any rights held under this Note unless such waiver is made expressly and in writing. Waiver by Lender of a breach or violation of any provision of this Note shall not constitute a waiver of any other subsequent breach or violation. In the event that any of the provisions of this Note are held to be invalid or unenforceable in whole or in part, the remaining provisions shall not be affected and shall continue to be valid and enforceable as though the invalid or unenforceable parts had not been included in this Note.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first stated above.
SIGNATURES
Borrower Signature: ________________________
Borrower Full Name: ________________________
Guarantor Signature: ________________________
Guarantor Full Name: ________________________
Lender Signature: ________________________
Lender Full Name: ________________________
Frequently Asked Questions
Does an unsecured promissory note have to be notarized?
Unsecured promissory notes do not generally have to be notarized. However, you should consider notarizing it to strengthen the note’s validity when the loan amount is significant (i.e., exceeding $100,000).
How do I enforce an unsecured promissory note?
You can enforce an unsecured promissory note by petitioning the courts. however, if the court does not rule in your favor, you will not receive repayment for your note.
For more details, read our article on how to enforce a promissory note.
Can I sell my unsecured promissory note?
Yes, you can sell your unsecured promissory note, as promissory notes are generally negotiable instruments unless otherwise agreed upon in the note’s terms. However, keep in mind that the market for unsecured notes may be less robust, and competitive terms might be necessary to attract buyers.
Seeking legal and financial advice is advisable before proceeding with any promissory note sale.
What are the risks of unsecured promissory notes?
Unlike secured promissory notes, unsecured promissory notes have promises but do not have valuable collateral. With unsecured notes, lenders face larger financial risks.
If the borrower fails to pay, the lender must file a lawsuit or consult a collection agency to collect the money.
