Last updated July 3, 2024
What is a Promissory Note?
A Promissory Note documents the legally binding promise that a borrower makes to pay back a loan under certain terms and conditions. However, unlike an IOU that simply acknowledges a debt amount, a Promissory Note details the consequences of failing to repay a loan.
LawDepot’s Promissory Note template allows you to include information about:
- The parties involved
- The amount of money being loaned
- The date the lender will transfer the money
- A basic repayment plan
You can also add extra details, such as interest rates, collateral security and the consequences of failing to make a payment.
A Promissory Note is also known as a/an:
- Commercial paper
- IOU
- Note payable
When should I use a Promissory Note?
People typically use Promissory Notes for loans that come from non-traditional money lenders like individuals or companies instead of banks or credit unions. These short- or long-term loans often help people achieve various personal and business goals. For instance, you can use this document when borrowing or lending a moderate sum of money to:
- Purchase real estate
- Start a business
- Buy a vehicle
- Consolidate debt
- Renovate or construct a home
Use LawDepot’s Loan Agreement for loans of a large amount or that come from multiple lenders. The Loan Agreement is more comprehensive than a Promissory Note and includes clauses about the entire agreement, additional expenses, and the process for amendments (i.e., how to change the terms of the agreement).
How do I make a debt repayment plan?
LawDepot’s Promissory Note template provides several options for customising a borrower’s repayment plan. For instance, lenders can get compensation for loaning money by charging interest. Lenders often charge an interest rate equal to the rate of inflation to offset the decaying value of money that inflation causes over time. Although, lenders who are concerned about the borrower defaulting on payments may charge a higher interest rate.
Another repayment option is requiring the borrower to repay the loan at once (on a specific date or upon demand) or over time with regular payments. Outlining this term in a Promissory Note largely depends on the borrower’s financial situation. That being said, if the borrower has poor credit or unstable income, the lender may require some form of collateral for security.
Although our template cannot give a valid security interest in real estate or land, you can use collateral such as:
- Valuables like jewellery or collector’s items
- Investment accounts
- Business inventory
- Vehicles
- Cash
In some situations, the lender must also provide the borrower with an amortisation schedule. This payment schedule calculates the time it will take to pay off a debt by determining how much of each payment goes towards the principal amount and interest.
How do I amend a Promissory Note?
If a borrower is behind on payments, a lender can amend the terms of their Promissory Note with an Amending Agreement. However, it’s important to note that both parties must give informed consent before any contract changes can go into effect. Generally, parties show their consent by signing the amendment document.
Amendments are beneficial because they can address needs that might only become apparent after a lender issues a Promissory Note. Plus, if the parties can agree on contract changes, they can avoid a dispute and costly litigation fees by amending their agreement themselves.
Be sure to attach any contract amendments to the original Promissory Note. This will reinforce the validity of the newly agreed-upon terms and keep all the parties in mutual understanding.
How do I enforce a Promissory Note?
Sometimes a borrower may fall behind on payments or stop paying back a loan altogether. Lenders may then have to take steps to enforce the agreement. Generally, the first step to enforcing a Promissory Note is to send the borrower a Demand Letter that restates payment terms and threatens legal action if the terms are not met by a certain deadline.
If the borrower does not comply with the demand, the lender will likely seize any collateral used to secure the loan and seek court enforcement of debt repayment. Some lenders may sell the debt to a collection agency in order to cut their losses and recoup some money. In either case, it’s important to research the laws that govern debt collection in your jurisdiction to ensure you go about the process properly.
For instance, the court process for debt recovery varies depending on state and territory laws. Also, any debt collection that occurs outside of court must be fair, flexible, and realistic. In some cases, a lender may still be liable for the unethical actions of a collection agency (e.g., putting an unfair amount of pressure on a borrower to pay).
Lenders can refer to the Australian Consumer and Competition Commission for guidelines on legal debt collection methods. Speak to a lawyer if you’re unsure how to handle an overdue debt.
What happens when a borrower pays off a Promissory Note?
Once a borrower repays their debt, there isn’t a need to do anything else. However, if the borrower is only able to pay back a portion of the debt, the lender can use LawDepot’s Release of Liability to release them from their obligations under the Promissory Note. With this document, the lender states that they are satisfied with some level of compensation and agree not to pursue any legal actions against the borrower in relation to the debt.
