A promissory note form (sometimes also called a loan agreement or IOU) is a legally-binding document whose purpose is to make sure a lender will receive the money (plus the interest) from the person or organization they have lent the money to. A typical promissory note example specifies the amount, frequency, payment schedule and deadline, as well as other information related to the agreement.
When to Use a Promissory Note
A simple promissory note may come in handy when a person lends a certain sum of money to a friend or relative. But when it goes about big-time business or a large amount of cash changing hands, such documents are an absolute must. That is why it is a crucial element of deals involving mortgages, car loans, student loans, and a number of business loans in the realm of real estate, commerce, investment, etc.
Such high-level papers tend to be rather sophisticated forms that are often accompanied by other documents, such as a shareholder agreement, a security agreement, an asset purchase contract, or an NDA.
Promissory Notes by Type
Depending on the mentioning of some assets that safeguard the return of the borrowed money, promissory notes can be secured or unsecured.
- If it is the former, the borrower has to relinquish some collateral (goods, services, or property) if they fail to pay back the borrowed sum. To ensure fair repayment, the value of the provided collateral should be at least equal to the borrowed amount.
- An unsecured note doesn’t mention any collateral. The lender may agree to such a note if the borrower has a healthy credit score.
According to the term of repayment, promissory notes may be due on a specific date or on demand. A template for simple promissory note of the first type contains a specific payback date when the lump sum (plus the interest) is to be returned to the lender. The second type of note is issued to control the return of open-ended loans, when the lender (giving a notice some time in advance) can demand the repayment of the debt at their convenience.
Also, the lender may want to receive the payback either as the entire sum in one go or agree to split the repayment into portions. The second occasion mostly occurs in case the money is used to buy big-ticket items (for instance, electronic devices, appliances, cars, or boats). It requires a promissory note of installment payments, conventionally on a monthly basis. A variety of this note relying on the so-called balloon payment system is typically applied in mortgage loans.
by State
In the USA, there are no federal laws regulating the domain of promissory notes. This legal area is considered to be within the jurisdiction of states. State laws are pretty much similar in their form and content, so you can make use of standard printable promissory note templates available at PandaDoc. That said, we still recommend consulting local legislation because in some minor aspects (like whether the lender must sign the note or not), the states may differ.
How to Write a Promissory Note Sample
Documents like that are meant to be legally enforceable, which is why the following elements of them are mission-critical.
- Names of stakeholders. These should be the legal names (titles) of the parties involved in the transaction.
- Contact details of the parties. Here, the addresses and phone numbers of the lender and borrower are mentioned.
- Loan amount. This is the sum that is lent by one side and borrowed by the other.
- Repayment date. The date on which the payment is due must be set out clearly (concerning both the whole sum and the installations – if such a payment option is agreed upon). On-demand promissory notes don’t have this item.
- Rate of interest. It is mentioned if the borrower demands it and the lender agrees to be charged. Here also, the rate of interest (calculated on the basis of the annual percentage rate) is pointed out.
- Final amount. This is the total sum to be paid by the borrower (the loan body plus the interest).
- Collateral. It appears only in a secured promissory note. It is a list of goods and services with their value that is put as a guarantee on a loan.
- Repayment terms. Alongside the very terms, this clause includes the stipulations related to late or missed payments.
- Default terms. This part contains consequences that come into play if the borrower fails to repay the loan when it is due.
- Signatures. The mandatory ones are the signatures of the borrower and a witness. An optional component (depending on the state) is the signature of the lender.
Like any other legally-binding paper involving financial considerations, a promissory note is a no-joke document whose creation should be entrusted to a vetted legal expert. If that sounds too expensive and time-consuming, there is a better alternative. On our site, you can find a free promissory note template that can be customized in no time to meet your particular requirements, printed out, and signed by the parties involved.
Minimize red tape and eliminate legal headaches with workmanlike loadable promissory templates by PandaDoc!
Promissory Note Template
Used 4,984 times
Use this free promissory note template to create straightforward promissory notes (also called notes payable) for your clients. Quickly fill out pre-written sections, which cover payment amounts, dates, laws relating to your jurisdiction, and more, to create a thorough and legally binding document.
Use Promissory Note Template
Mortgage Note Template
Used 4,886 times
Download this Mortgage Note Template to give the lender assurance that the borrower and other parties responsible for the debt will pay the remaining balance on the mortgage.
Use Mortgage Note TemplateFAQ
As the root of the word suggests, it is a certificate of an official and legally-binding promise. In it, a person or an organization makes a commitment to repay the money that they borrow from a lender on certain conditions. These typically include a specific date, interest on the loan, and the collateral pledged as a security of complete and timely return of the debt.
A promissory note becomes invalid when one of the following conditions is met: The note isn’t signed by at least one of the parties prescribed by the state law. Payment amount, interest rate, or schedule is missing. It contains unclear clauses or unreasonable terms. The statute of limitations (from 3 to 15 years) is expired. The original copy is lost. Some changes are introduced in the note without a new agreement.
The mandatory signatures under a promissory note are those of the borrower and a witness. As to the signature of the lender, the legislations in various states differ. In some of them, the lender isn’t obliged to do that since (s)he is under no commitment under the note. In others, the lender has to sign the note alongside the lender and the witness.
You can write a template from scratch each time you need it. But it is hardly a wise decision in terms of the time and effort you will have to spend. If you want to facilitate document creation and signing as well as avoid mistakes in a finance-related legally-binding form, it is better to download a free secured promissory note template by PandaDoc.