Simple PDF Template

Some sellers may know nothing about the investments’ true origins—the promissory notes may be for companies that don’t exist. Promissory notes promising “low risk, high yield” investments may lead to a type of fraud, according to the SEC. You can see what a promissory note looks like below by viewing our sample. Create your own using our template and download the final version in PDF or Word format. Promissory notes are particularly useful when trust exists between the lender and borrower. This is not an exhaustive list of sections that may be included; depending on the type of loan and the parties involved, it can be customized further.

• It’s important to remember that a promissory note is a legal contract and is enforceable in court.
• State-specific usury laws dictate the maximum amount of interest that may be charged on a loan.
• It’s an easy-to-use tool that will guide you in making sure the terms of your promissory notes are clearly set out.
• They both include loan details, repayment schedules, and borrower/lender information.
• For example, let’s say you lend your friend $1,000 and he agrees to repay you by December 1st.

Understanding the legal framework surrounding Promissory Notes is crucial for both parties involved. A promissory note also describes the events that are considered a “default,” and the lender’s legal remedies if there is a default. For example, an event of default might be nonpayment for a particular amount of time, and the lender might be entitled to repossess the collateral. A mortgage refers to the loan a homebuyer uses to purchase a property. The purchased property is typically used as collateral for this type of secured loan. Homebuyers technically don’t own their homes until the mortgage is repaid in full.

What makes a promissory note legal?

The most common type of promissory note is for a simple lump sum to be repaid by a certain date. State-specific usury laws dictate the maximum amount of interest that may be charged on a loan. Statutes of frauds, also state-specific, require that loans over a certain amount be memorialized in writing to be enforceable.

Assessing the Borrower’s Ability to Repay

By signing the MPN, a student agrees to repay all loans according to the terms and conditions of the MPN. Federal student loan MPNs are currently valid for up to 10 years. To make a thorough Promissory Note, include any additional information relevant to the loan. For example, include any specific requirements the borrower must follow if the loan is repaid early (e.g., a legal fee or a certain number of months’ worth of interest). Promissory notes that are longer than nine months, and/or that provide the lender with interest in the company, are much more likely to be classified as securities. If you are concerned that your promissory note could be classified as a security, you should consider consulting with a lawyer with expertise in the field.

If you are still unsure of the details, read through our FAQs below to learn more about their purpose and essential elements. However, notarizing a Promissory Note can help strengthen both parties’ signatures and create further protection if a future dispute occurs. This note shall be governed under the laws in the State of STATE. The document is created before your eyes as you respond to the questions. The face value of the amount borrowed, also known as the “principal,” should be clearly stated.

However, with an informal IOU between friends or family, there is limited—or no—legal recourse if the borrower does not repay the amount borrowed. For small amounts of money that the lender will not miss, a promissory note is probably not necessary. Using a legal template allows you to document essential details to make your loan official. This includes the parties involved, when the money must be repaid, and any interest that should be paid on the capital that has been borrowed. People sometimes neglect to include critical details such as the interest rate, payment schedule, and due dates. Without these specifics, both parties may have differing expectations about the repayment process, which can lead to disputes later.

Amount Borrowed

• Failing to obtain the necessary signatures can render the document ineffective, leaving the lender without legal recourse in case of default.
• Keep the promissory note with your other important papers, so you can find it if you need to.
• Also, because a promissory note is a negotiable instrument, it is not uncommon for a mortgage lender to sell the note to a third party, such as a bank or a private entity.

The lender—known as the payee—is typically the owner of the original promissory note until the borrower repays the loan. In some cases (like for a mortgage loan), the note may also be held by a financial institution or investment group. However, it’s advisable to consult an attorney to ensure the legal document is valid and legally enforceable. It’s also a good idea to get your promissory note notarized to prevent future disputes. Promissory notes should be created to fit the transaction that you are involved in.

The note spells out the amount borrowed by one party, as well as how and when the money will be paid back. A promissory note is a legal contract that binds the borrower by law. To explore this concept, consider the following promissory note definition. They both include loan details, repayment schedules, and borrower/lender information. Promissory notes strike a balance between the simplicity of an IOU and the formality of a loan contract. An unsecured promissory note does not require the borrower to provide any collateral in order to receive the loan.

Once the document is signed by both parties, it becomes a legally binding contract. A master promissory note is an ongoing agreement between the borrower and the lender. Similar to a master services agreement, a master promissory note allows both parties to agree to a set of terms that will govern multiple loan agreements. This type of promissory note is commonly used for student loans, where multiple loans are expected to be taken out over a relatively short period of time. A promissory note is a contract completed when a party (lender) loans money to another (borrower).

LawDepot’s Promissory Note template is available to create a secured or unsecured note for personal or business loans. For example, say you loan a cousin money to help with their small business debts. Your note can be secured and include details on any collateral and late fees to give you peace of mind for repayment. A promissory note is a written agreement where one party promises to repay a loan amount. This promise-to-pay agreement outlines agreed-upon terms, including repayment schedules, interest rates, and penalties. Putting the loan terms in writing can help reduce misunderstandings and disputes.

How to Write a Promissory Note

Charging more than the legal rate can lead to penalties or make the loan unenforceable. Below is a summary of maximum interest rates for private loans by state. If the lender has concerns about the borrower’s financial stability, they can request a cosigner or a personal guarantee of repayment from a business owner. This person agrees to be responsible for the loan if the borrower defaults.

But as payments are made on the mortgage, a homeowner’s equity grows. Unlike an I.O.U. — which only acknowledges a debt amount — a Promissory Note outlines the terms and conditions of the loan and the consequences of failing to repay it. The key components of a note include the loan amount, interest rate, late fees, and repayment plan. A Promissory Note is a binding document that outlines a borrower’s legal promise to repay a loan to a lender. A promissory note is different from a vendor note in that a vendor note is a short-term secured loan that a vendor provides to a customer. The vendor note is a form of vendor financing, which is secured by goods the customer buys from the vendor.

Open-ended promissory note

In these situations, promissory note it’s highly recommended to consult an attorney to protect your rights. Ensure both parties have copies of the signed note for their records. Learn the promissory note definition, how it works and what are its pros and cons. It is possible to create your very own Promissory Note online using our Promissory Note template and specialized advice as a foundation.

Student Loan Promissory Notes

Also known as a “note payable,” it is a legally binding document that outlines the terms and conditions of the loan and holds the borrower accountable for repaying the borrowed amount. This type is used to record a personal loan made between two parties. While not all lenders use legal writings when dealing with friends and family, it helps avoid confusion and hurt feelings later. A personal promissory note shows good faith on behalf of the borrower, and provides the lender with recourse should the borrower fail to pay back the loan. A Promissory Note is a written promise to pay a specified amount of money to a designated person or entity at a particular time or on demand. This essential financial document serves as a record of the borrower’s commitment and outlines the terms of repayment.

Because it is governed and regulated by individual states, the allowed maximum interest rate may vary widely from one place to another. For example, California sets a cap at 10% for interest on personal loans, while Nevada’s allowed maximum rate is 36%. A promissory note is simply a promise in writing, stating that the borrower will pay back the full amount of a loan under the lender’s terms of repayment. A lender can structure the promissory note with interest to calculate a monthly or annual interest rate, based on the amount remaining on the principal loan. When the borrower makes payments, the payment is applied to the accrued interest first, then the balance of the payment is applied to the principal.

For this type of promissory note, a company will typically be seeking a short-term loan. Promissory notes are commonly used in business as a means of short-term financing. For example, when a company sells products but hasn’t yet collected payments, cash may run low, leaving the company unable to pay creditors. The company may ask creditors to accept a promissory note to be exchanged for cash after the company collects its accounts receivables. In the United States, promissory notes are often used when getting a student loan, mortgage, or a loan from a friend or family member. Promissory notes are also sometimes issued to corporate clients.