How to Write a Promissory Note

If you borrow or lend money, a promissory note sets the terms and details of your loan. Though it might seem like another boring document to be skimmed quickly, it’s a key component of loans with very important – and legally binding – details.

If you’re preparing to sign on the dotted line on a promissory note, understanding how a promissory note works and what it should include is crucial.

What Is a Promissory Note?

A promissory note is a written agreement to pay someone – essentially an IOU. But it’s not something to be taken lightly. “It is a legally binding written document effectuating a promise to repay money,” says Andrea Wheeler, a business attorney and owner of Wheeler Legal PLLC of Florida.

Promissory notes are often used in the financial services industry. Zachary D. Schorr, a Los Angeles-based attorney, says, “They are typically used for formal loans like mortgages or commercial loans where the borrower makes a promise to repay a loan in writing.” If you take out a car loan or student loan, for instance, you would sign a promissory note agreeing to the terms, conditions and payback schedule for it.

A promissory note can also be used in less formal situations, such as when you lend money to a friend, family member or business partner, in order to make the loan official. You probably don’t have to worry about lending a few bucks, but making a significant personal loan to another person or even a business likely warrants an official promissory note.

What a Promissory Note Includes

In order for a promissory note to be valid and legally binding, it needs to include specific information.

“A promissory note should include details including the amount loaned, the repayment schedule and whether it is secured or unsecured,” says Wheeler. But that’s not all. In fact, there are quite a few details required for a legally binding promissory note. If you’re signing a promissory note, make sure it includes these details:

Date. The promissory note should include the date it was created at the top of the page.

Amount. The amount of money being borrowed should be written in numbers and spelled out in words, just like writing a check. This way, there’s no chance of the amount due being misread or altered. For example, if the promissory note is for $5,789, it should also say “five thousand seven hundred eighty-nine dollars.”

Loan terms. The loan terms explain how the loan will be paid back, including how often payments will be made (such as monthly, quarterly or annually), when the first payment is due and when the final payment needs to be received. There should be specific dates rather than ambiguous timelines.

Interest rate. This detail explains whether there is interest charged on the loan, and if so, what the rate will be and if the interest rate is fixed or variable. Like the loan amount, the interest rate should be represented as a numerical percentage and written out in long form. Wheeler also notes that the interest rate must comply with state usury law.

Collateral. Some types of loans are backed by collateral in case the borrower isn’t able to repay what they owe. These are known as secured loans. If the loan is secured by collateral, the promissory note should detail what the collateral is and its value. For example, perhaps the borrower is putting up a piece of property as collateral. The promissory note should include a description of the property, including whether it’s commercial or residential, its value and the address. However, “Not all promissory notes are backed by security,” says Schorr. “A promissory note is enforceable through an ordinary breach of contract claim.” In other words, it’s not required that the loan be secured; an unsecured loan is still enforceable as long as the promissory note is fully completed.

Lender and borrower information. This section covers the names and contact information for all people involved in the loan. It describes who is the lender and who is the borrower, as well as the mailing address or digital destination where payments are to be sent.

Signatures. Finally, to be enforceable, both parties must sign and date the promissory note, says Wheeler. This is how both the borrower and lender acknowledge that they understand the terms and their responsibilities. “It is also good practice to have a promissory note notarized so the lender can be sure that the proper person is providing the repayment promise for the loan,” says Schorr.

What Happens When the Loan Is Paid?

When you reach the end of the loan, it’s a good idea to release everyone of responsibilities. This can be achieved with a release of promissory note or another document that indicates the loan is complete and paid in full.

Although there’s no way to fully protect yourself from potential claims, lawsuits or other issues related to a loan you were involved in, the release document can strengthen your defense if something like that does come up.

A release of promissory note is appropriate when all parties have performed all of the duties outlined in the original contract. Each party should consider if they are satisfied with how the terms of the loan were completed. Also, if any collateral was used to back the loan, the release should indicate that there is no longer any lien or other hold on it.

The release should include a few key details: a reference to the original promissory note and its date, as well as the original loan amount. The release should describe that the terms of that document were met and the borrower is released of obligation. And it should include the names and contact information for all parties involved, just like the original note.

The release of promissory note should also be signed and dated by the lender and the borrower. As an added measure, it can include a copy of the original promissory note with a notation that says “paid in full” or “canceled.”

Again, having this document notarized is one extra step you can take to ensure it has validity and can’t be disputed later.

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