Last Updated July 3, 2024
What is a Promissory Note?
A Promissory Note is a written promise from a borrower to repay a sum of money to a lender according to the terms set out in the agreement. A Promissory Note goes into detail about the consequences of failing to repay a loan. For instance, this form typically includes details of the original loan amount, any applicable interest rates or late fees, a repayment plan, and collateral security.
A Promissory Note is also known as a/an:
- Secured Note
- IOU
- Loan Note
- Demand Note
When should you use a Promissory Note?
Use a Promissory Note for:
- Business loans, such as capital for a startup business
- Purchases, such as a vehicle, boat, or furniture
- Real estate loans, such as a down payment on a home
- Personal lending between friends or family for debts or bills
To write a Promissory Note, be sure to include the following information:
- Party details: Identify the lender and borrower. The lender may be a corporation or an individual. You may also include a co-signer who agrees to pay the debt if the borrower defaults on the loan.
- Loan amount: Specify how much money the lender will loan.
- Payment plan: Create a repayment schedule, including whether the borrower may repay the loan in a single payment or regular payments, when the final amount is due, and if the borrower can repay the loan early or in lump sums.
- Interest and late fees: If the lender charges interest, they may specify the percentage of interest and how often it’s compounded (monthly, every six months, or yearly). The lender may also penalize overdue payments by charging late fees or increasing the interest rate.
- Collateral and insurance: A borrower may use collateral to secure the loan. If the borrower defaults, the lender seizes the collateral. Collateral may be a vehicle, jewelry, or other assets. The lender may also require the borrower to obtain insurance if the loan is for a vehicle.
What happens if the borrower defaults on the loan?
Send a Demand Letter to the borrower to enforce your Promissory Note in the event of a missed payment or loan default.
If the borrower is unable to make payments, the lender may begin the process of seizing the collateral secured in the Promissory Note. Alternatively, the lender may pursue legal action and go through the courts to seek restitution.
How do I sign a Promissory Note?
Depending on your jurisdiction, you may not need witnesses to sign the Promissory Note. However, having a third party present is evidence that the borrower signed the Promissory Note. This evidence is useful if the lender needs to enforce the borrower's promise to pay in court.
At the very least, the borrower must sign the Promissory Note, but it may be beneficial to have both parties sign the document.
