Promissory Note: Definition, When To Use, What's Included
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What Is a Promissory Note?
A promissory note is a written promise to pay within a specific time period. This type of document enforces a borrower's promise to pay back a lender by a specified period of time, and both parties must sign the document.
A promissory note is not the same as a contract. A contract details all the terms of a legal agreement. A promissory note typically covers the following elements:
- The date by when someone needs to be paid
- How a person or organization needs to be paid
- How much a person or organization needs to be paid
Promissory Note Templates
Promissory notes are common documents in any financial service. You've likely signed one if you have taken out any type of loan in the past.
You may also encounter a promissory note referred to as:
- Commercial paper
- Demand note
- IOU
- Loan agreement
- Notes payable
A promissory note establishes a clear record of a loan, either between individuals or between entities. By placing all relevant details in writing, a promissory note ensures clarity on due dates for payments and the amount of payments.
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When Should I Use a Promissory Note?
A promissory note is commonly used for the following transactions:
- Business loans
- Car loans
- Mortgages
- Personal loans among friends or family
- Student loans
If you are lending a person or a business money, you may want to formalize the loan by creating a promissory note. A promissory note is especially important if you are lending a large amount of money. The promissory note functions as a legal record of your loan, helping to protect you and to ensure that a person or organization repays you.
Common types of promissory notes include the following:
- Commercial: These notes are more formal and detail specific conditions of a loan.
- Investment: A company can decide to issue a promissory note to raise capital. The company can also sell these notes to other investors.
- Personal or informal: These notes generally involve one family member or friend loaning a sum of money to another family member or friend.
- Real estate: These notes accompany a home loan or other real estate purchase.
What Should I Include in a Promissory Note?
A promissory note should include all terms and details to which both parties of a loan are agreeing. Since every state has its own laws governing the essential components of a promissory note, you'll want to verify the laws of your state. State-specific laws can greatly impact the enforceability and terms of a promissory note.
Important details any promissory note should state include the following:
- Payor or borrower: Include the name of the party who promised to repay the stated debt
- Payee or lender: Include the name of the lender, the person or entity, lending the money
- Date: List the exact date the promise to repay is effective
- Amount or principal: State the face amount of the money borrowed
- Interest rate: If the loan involves interest, the promissory note should include the interest rate charged. The interest rate may be simple or compounded. There are usury laws in many jurisdictions that limit the amount of interest a lender can charge for a loan.
- Date first payment is due: A common arrangement is to have the first payment due on the first day of the month and subsequent payments due on the first date of the following months.
- Details of each payment: If multiple payments are due, the promissory note should include how often payments will be made as well as the amount of each payment.
- Date the promissory note ends: In the case of an amortized loan, a loan paid off in a series of even and equal payments on a specified date, the date the note ends could be the last payment. An agreement could also involve a balloon payment, specifying a date on which the entire unpaid balance is due.
- Signatures: Make sure signatures of both the borrower and the lender are included on the promissory note. For most jurisdictions, a promissory note needs signatures to be legally enforceable. It is worth noting that some jurisdictions may enforce a promissory note even if only signed by the borrower, provided other conditions are met.
Types of Promissory Notes
Different types of promissory notes are appropriate for different types of agreements. You should create your promissory note to fit the type of transaction in which you're involved. Promissory notes can be as simple as a one-time payment from a friend. Transactions such as car loans and mortgages require more complex promissory notes that cover details such as amortization schedules, interest rates, and more.
Types of promissory notes include the following:
- Simple promissory note
- Demand promissory note
- Secured promissory note
- Unsecured promissory note
Simple Promissory Note
If you're writing a promissory note for a lump sum repayment, you'll typically use a simple promissory note. An example is lending your sibling $2,000. Your sibling agrees to pay you money back by January 1. A simple promissory note will state the full amount is due on the stated date; you won't need a payment schedule. You can decide whether to charge interest on the loan amount and include the interest in the document if needed.
Demand Promissory Note
A demand promissory note makes payment due when the lender asks for the money back. You will typically need to provide a reasonable amount of notice to use this type of promissory note.
Secured Promissory Note
A secured promissory note secures the amount loaned with an asset of value, for example, a home or vehicle. If the borrower does not pay back the loan amount within the agreed-upon time frame, the lender has the right to seize property of the borrower. This often involves a legal process the lender needs to go through in order to seize the property.
For example, when you buy a house, the house is collateral on your mortgage. Your bank can seize your home if you do not make stipulated payments by way of a legal process.
Unsecured Promissory Note
This type of promissory note does not allow the party lending the money to secure an asset for the loan. If the borrower does not make the payment, the lender must instead file in small claims court or go through other legal processes to enforce the note.
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What Happens When a Promissory Note Is Not Paid?
Promissory notes are legally binding documents. Someone who fails to repay a loan detailed in a promissory note can lose an asset that secures the loan, such as a home, or face other actions.
You have a few options if someone who has borrowed money from you does not pay you back. First, you should ask for the repayment in writing. A written reminder might be all you need to do to get your money paid back. Past due notices are commonly sent at 30, 60, and 90 days after the stated due date.
If the borrower still does not pay you back, you might consider asking your borrower to make a partial payment. You can create a debt settlement agreement if you decide to accept partial repayment of a debt. You may also consider creating an extended payment plan that allows the borrower to pay you back in full over a revised period of time.
You can also choose to use a debt collector to obtain repayment. A debt collector works with you to collect the note, generally taking a percentage of the payment. Alternately, you can sell the note to a debt collector. Selling a note to a debt collector gives the debt collector ownership of the loan and the ability to collect the full amount. It is more common to assign debt to a debt collector, though.
If nothing else works, you can also sue your borrower for the full amount owed to you.
When writing a promissory note, make sure to include all important details to protect yourself. Get in touch with an experienced lawyer for help drafting your document.
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Ralph S.
Ralph graduated from University of Florida with his JD as well as an LLM in Comparative Law. He has a Master's in Law from Warsaw University , Poland (summa cum laude) and holds a diploma in English and European Law from Cambridge Board of Continuous Education. Ralph concentrates on business entity formation, both for profit and non profit and was trained in legal drafting. In his practice he primarily assists small to medium sized startups and writes tailor made contracts as he runs one of Florida disability non profits at the same time. T l Licensed. in Florida Massachusetts and Washington DC this attorney speaks Polish.
"Ralph goes above and beyond , i would give 10 stars if i could !"
LeMont J.
LeMont Joyner is the Managing Partner of Rosenberg, Cohen & Joyner LLP, where he leads the firm’s corporate and transactional practice with a focus on delivering practical, business-oriented legal solutions. His practice spans corporate law, commercial transactions, and real estate matters, advising clients through entity formation, governance, contract negotiation, acquisitions, and complex deal structuring. In the corporate and transactional space, LeMont counsels closely held businesses, startups, and growth-stage companies on formation strategy, operating agreements, shareholder arrangements, and day-to-day commercial contracting. He is known for structuring deals in a way that balances legal protection with operational flexibility, ensuring that agreements are both enforceable and commercially workable. His real estate practice includes representing clients in residential and commercial transactions, including purchases, sales, leasing arrangements, and hybrid structures such as rent-to-own and option-to-purchase agreements. He regularly works with clients to navigate deal risk, clarify ownership timelines, and document transactions to minimize future disputes. As Managing Partner, LeMont oversees firm strategy and client development while maintaining a hands-on role in key transactional matters. He is focused on efficient execution, clear communication, and aligning legal structures with his clients’ broader business and investment objectives.
"Amazing work. Very professional and very patient with me. Highly recommend."
Mike R.
Rusco Law combines big-firm expertise with small-firm personal attention to give a limited set of clients unparalleled representation and service. We provide: • Complete litigation services, from pre-filing demands through Supreme Court appeals. Extensive experience in commercial, employment, tribal, and personal injury matters. • Sophisticated business counseling with an emphasis on start ups, including formation, risk management, internal governance, employment policy, regulatory advocacy, and trademark/trade secret/patent protection. • Detailed contract negotiation, review, and compliance monitoring, including major construction and service agreements. • Full-spectrum legal support for principals and their families, including passionate injury representation, including childcare and playground accidents.
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Michael M.
www.linkedin/in/michaelbmiller I am an experienced contracts professional having practiced nearly 3 decades in the areas of corporate, mergers and acquisitions, technology, start-up, intellectual property, real estate, employment law as well as informal dispute resolution. I enjoy providing a cost effective, high quality, timely solution with patience and empathy regarding client needs. I graduated from NYU Law School and attended Rutgers College and the London School of Economics as an undergraduate. I have worked at top Wall Street firms, top regional firms and have long term experience in my own practice. I would welcome the opportunity to be of service to you as a trusted fiduciary. In 2022 and 2023, I was the top ranked attorney on the Contract Counsel site based upon number of clients, quality of work and number of 5 Star reviews.
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We are a boutique firm located in San Diego that handles civil litigation with a couple other areas of law.
"Matthew was absolutely excellent to work with. He responded to our project request immediately, was always available via text, phone, or email to answer any questions, and handled our demand letter quickly and efficiently. We got a response same-day as a result of Matthew's demand letter, and we had a check in our hands within a few short weeks of hiring him. He even offered to handle a few additional things, like negotiations and document signing, and finalizing the settlement. Would highly recommend Matthew for your legal needs!"
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I am a licensed attorney in Illinois, I am currently a Regulatory Compliance Analyst.
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Torrey Livenick, Esq. is a fourth generation Colorado lawyer. Although she was born in California and raised in Nevada, she spent every summer in Colorado and knew she planned to make Denver her home. After graduating from Bryn Mawr College with a degree in Classical Culture and Society, she returned to Las Vegas to work as a paralegal. Once she spent five years building her skills and confirming her interest, she attended Emory University School of Law. Torrey’s interests include trivia (she even was a contestant on Jeopardy! during her law school days), video games, playing with her cats, and the arts. She is active in pro bono organizations including Metro Volunteer Lawyers.
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"I had an excellent experience working with Allen to review my promissory note. Allen was professional, thorough, and took the time to clearly explain the terms, risks, and implications in a way that was easy to understand. I appreciated his attention to detail and responsiveness throughout the process. His guidance gave me confidence and peace of mind before moving forward. I would highly recommend his service to anyone needing careful and knowledgeable legal review."
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Dispute
Promissory Note
Florida
I have a issue with a borrower that has broke a promissory note. What can I do to recover my money legally?
I agreed to loan someone money and made a promissory note saying he will agree to pay the money in montly installments and interest if late plus legal fees if moneybis not paid. Its been close to a year have received not one penny. I'am looking for legal advice as I never been this far with this, as most people have always paid me back.
Donya G.
Yes you can. Did you sign a promissory note? What does it say about disputes over payment? How much money is owed? If you need additional information you can contact me on the website for assistance. Thanks Donya Gordon
Financial
Promissory Note
California
When to use a promissory note?
I recently started a small business and am in need of a loan to expand operations. I am researching the different types of financing available to me and came across promissory notes. I am unfamiliar with the process and need guidance on when a promissory note is appropriate for my loan.
Russell M.
I'd be happy to explain what a promissory note is and provide context regarding its use in financing a business, as well as alternatives. A promissory note is a legal document that outlines a borrower's promise to repay a specific amount of money to a lender within a defined period of time. It serves as evidence of a debt and includes details such as the principal amount, interest rate, repayment terms, maturity date, and any additional terms and conditions agreed upon by both parties. Promissory notes are commonly used in business financing to secure loans from individuals, financial institutions, or even other businesses. They are a formal way to document the terms of a loan and provide legal protection to both the borrower and lender. In the context of financing a small business, promissory notes can be a suitable option when: 1. Borrowing from family and friends: If you're seeking funding from personal contacts, a promissory note can formalize the agreement, clarify repayment terms, and protect relationships. 2. Seeking private financing: Promissory notes can be used to secure loans from private investors or other businesses. They offer flexibility in negotiating terms, allowing you to tailor the agreement to your specific needs. 3. Exploring alternative lending options: In some cases, small businesses may face challenges obtaining loans from traditional financial institutions. Promissory notes can be an alternative financing method that appeals to investors looking for higher returns or businesses with unique circumstances. However, it's essential to consider alternative financing options alongside promissory notes. Here are a few alternatives to keep in mind: 1. Bank loans: Traditional bank loans often offer favorable interest rates and longer repayment terms. They may require more documentation and have stricter qualification criteria, but they can be an attractive option for businesses with a solid credit history and established operations. 2. Small Business Administration (SBA) loans: The SBA provides government-backed loans to small businesses. These loans typically offer competitive terms, including longer repayment periods and lower down payments, but they often involve more paperwork and longer approval processes. 3. Equity financing: Instead of borrowing money, some businesses opt to sell equity in their company in exchange for funding. This approach involves giving up a portion of ownership but can provide access to larger amounts of capital and potentially benefit from the expertise of investors. 4. Crowdfunding: Crowdfunding platforms allow businesses to raise funds from a large number of individuals, often in exchange for rewards or equity. It can be a viable option for startups or businesses with unique products or ideas. When considering financing options, it's crucial to assess factors such as the cost of borrowing, repayment terms, the impact on ownership, and the specific needs and goals of the business. Working with a financial advisor can help you evaluate the pros and cons of each option and determine the most suitable approach for your business's financing needs. For more, you can check out this excellent overview on Investopedia: https://www.investopedia.com/terms/p/promissorynote.asp
Loans
Promissory Note
Connecticut
Key terms in promissory notes?
I am a small business owner who recently loaned money to a business associate. The loan was made via a Promissory Note, which I drafted myself. I am now looking to learn more about the key terms and conditions of the note, in order to ensure the safety of my investment. I am hoping to gain a better understanding of the legal implications of the document, and how to protect my interests.
Thomas L.
1. How much is owed. 2. Interest rate. 3. Repayment schedule. 4. Specific defaults (something specific to the borrower) 5. General defaults - failure to pay, bankruptcy.
Debt
Promissory Note
Illinois
Can you do a promissory note for my tenant?
my tenant owes me $10,400 back rent, she promises to pay me back.
T. Phillip B.
Yes, you could create a promissory note and terms in that note for repayment of back rent. That would create an obligation for her that if she defaults, you'd file as a breach of contract rather than an eviction at that point.
Dispute
Promissory Note
New York
Breach of contract: Promissory note
Someone owe my money which he took as a loan signing a promissory note. He moved out of Syracuse, NY and know that he is living in the state of Ohio. How can I sue him to collect $7,286? Please help.
Donya G.
Does your promissory note talk about what happens if he doesn't pay? Does the law of NY apply to your agreement? If so, you can sue in NY court. In order to get a firm answer on what to do, I would need to review the promissory note and see what it says. You can connect with me and engage my services through Contracts Counsel. Donya Gordon
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Promissory note
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