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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Ivan B.
I grew up in Beaumont, Texas. I attended Baylor University for college and the The University of Texas School of Law for law school. I gained extensive experience in many areas of transactional law through my former position as corporate counsel at National Western Life Insurance Company and my current position as an Associate at Nance & Simpson, LLP.
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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.
"I had an excellent experience working with Ralph on my prenuptial agreement. From the beginning, Ralph was professional, knowledgeable, and incredibly patient. He took the time to explain the legal concepts, options, and implications in a way that was clear and easy to understand. He never made me feel rushed and was always willing to answer my questions thoroughly. What I appreciated most was his ability to make a potentially stressful process feel comfortable and straightforward. Ralph completed the agreement much faster than I expected, while still being extremely thorough and attentive to detail. I am extremely happy with his work and would not hesitate to recommend Ralph to anyone needing assistance with contracts or other legal agreements. His professionalism, responsiveness, and genuine willingness to help made all the difference. Thank you, Ralph, for making this process such a positive experience."
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I am an experienced small business attorney. I work diligently to ensure that small business owners achieve their objectives while maintaining compliance, satisfying legal duties, and engaging in smart contracting opportunities. I provide everything from organization, to lease/commercial real estate purchase agreement review and negotiation, and even IP filings. I can help to navigate commercial and government contracts, as well as other SaaS-type agreements.
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Liz is an experienced insurance professional, having worked with carriers and brokers for over 10 years. She can review or draft a variety of commercial agreements and is here to help your business. Specialties include: Master Service Agreements, business process outsourcing, marketing and partnership agreements, broker agreements, business associate agreements, and NDAs.
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I have been a freelance attorney for several years and have many of my clients returning to me for continued work because of the quality I produce.
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Ms. Leavens is a corporate attorney with 10 years of experience as the General Counsel, Chief Compliance Officer and Corporate Secretary of a Congressionally chartered, non-profit corporation, and more than 20 years of experience as an advisor to executive officers and boards of directors in for-profit and non-profit organizations. She has substantial experience within in-house legal departments managing cross-functional teams comprised of multiple business units and attorneys on large-scale mission critical projects, and within a global law firm as a manager of public and private, domestic and international, multi-party business transactions. She has unique experience implementing government-sponsored business initiatives. Ms. Leavens was honored in 2015 as one of Washington, D.C.’s Top Corporate Counsel by Bisnow and the Association of Corporate Counsel; nominated in 2014 for the Association of Corporate Counsel (WMACCA) Outstanding Chief Legal Officer Award; and the recipient in 2014 of WMACCA’s Community Service Award.
January 6, 2022
Elizabeth V.
Most of my career has been as in-house counsel for technology companies. My responsibilities included managing all vendor/procurement contracts and compliance, customer/partner/reseller contracts and compliance, data security/privacy compliance and incident responses, HR/employment issues, and legal operations. I am very comfortable negotiating Commercial Contracts, Vendor Agreements, and Procurement Contracts for goods, services, and licensing, as well as addressing Employment & Labor, Intellectual Property, and Data Privacy issues and compliance. I specialized and have a certificate in IP in law school and continued to develop in that area as in-house counsel for Interactive Intelligence, Genesys, which are unified communication companies, and KAR Global in the automobile digital services lines of business.
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Loans
Promissory Note
California
Is a promissory note legally binding?
I was told by my brother n sister that I would be able to borrow against my parents estate 20,000.00 to buy a trailer and car. This was my dad's wish. A trailer was bought for 13,563.95 and I was told I'd have to wait for car. I have medical issues and have to travel 45 miles either way to see my Drs so a car is very important. My brother executer and sister showed up yesterday saying they never said 20,000. and I'm only getting 15,000. They expected me to sign a promissory dated back in Nov 2020. I've always thought contracts should be signed before the fact not after. The money will be taken from my share of trust so why the note.
Rebecca S.
A promissory note is based on when the loan is made, not necessarily when the note is signed. So if the siblings actually loaned the money, regardless of when the note is signed, then a backdated note is ok. Review by an attorney is advised.
Business
Promissory Note
California
What happens to convertible note if startup fails?
I have a startup and am looking to raise money from investors. If we fail, are we going to be liable for anything if we raise money on a convertible note?
Michael M.
Typically, if the business fails, the note can then not be converted or repaid. Unless you have personally guaranteed the obligation which would be unusual, the recourse would be against the entity itself.
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
Consumer
Promissory Note
Connecticut
Promissory note termination options?
I recently signed a promissory note with a lender for a loan. I am now concerned that I may not be able to make the payments and am looking for options to terminate the promissory note if necessary. I need to know what my options are, as well as any potential consequences, regarding terminating the promissory note.
Thomas L.
Contact the lender and request a resolution of your loan, that is, some terminating reduction. The lender is under no duty to assist you, and can sue you for the unpaid balance, get a judgment and then seize your property (bank accounts, cars, etc) to get the note repaid.
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.
Quick, user friendly and one of the better ways I've come across to get ahold of lawyers willing to take new clients.
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