What Is a Promissory Note?
A promissory note is a written promise to pay a specified amount within a specific time period. This type of document is used by the lender to enforce a borrower's promise to pay back a loan.
A promissory note is a type of contract. Like a contract, a promissory note details all the terms of a loan agreement, including the following:
The identity of the lender and borrower
The date by when the loan is to be paid in full
How the borrower is to pay the loan
How much the borrower is required to pay
Promissory notes are common documents in any financial transaction. You've likely signed one if you have taken out any type of loan in the past. Common transactions include a loan to purchase your residence, a loan to purchase a vehicle or a loan involving a business matter.
When Should You Use a Promissory Note?
A promissory note is commonly used for the following transactions:
Business loans
Car loans
Real estate purchases
Personal loans among friends or family
Student loans
If you are lending a person or a business money, we strongly recommend that you formalize the loan by creating a written promissory note. Whether you are lending a small or large amount of money, it’s important to get it in writing. The promissory note is an enforceable agreement, 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
Personal or Informal
Real Estate
What Should You Include in a Promissory Note?
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 when writing a promissory note. No matter your state of residence, these important details should be addressed in your promissory note:
Payer or Borrower
Include the name and address of the person who promises to repay the loan
Payee, Holder or Lender
Date
Amount or Principal
Interest Rate
Date First Payment is Due
Details of Each Payment
Where Payments Are To Be Made
Date the Promissory Note Ends
Signatures
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 onetime payment from a friend in the future (a demand note). Transactions such as car loans and real estate loans 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
If you're writing a promissory note for a lump sum (one time)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 the following year. 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
Secured Promissory Note
Unsecured Promissory Note
If you have a situation where a promissory note is advisable, make sure to include all important details to protect yourself. Get in touch with one of our experienced business attorneys for help drafting your promissory note. Protect yourself. You can even have the attorneys fees made part of the loan and paid back by the borrower.