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A Promissory note is a contract, which means that it is legally binding. However, it must include certain conditions to ensure it is enforceable.

As with any other common law contract, a promissory note should contain all the necessary terms and conditions that are part of the agreement between the two parties that are involved.

A promissory note must include the date of the loan, the dollar amount, the names of both parties, the rate of interest, any collateral involved, and the timeline for repayment. When this document is signed by the borrower, it becomes a legally binding contract.

The lender may also sign the promissory note, but unlike loan agreements, they are not usually required to do so. However, the lender may require the borrower to sign the document in the presence of a notary. This helps to guarantee the signature.

Promissory notes can also be secured by collateral, but even if they aren’t, they are still legally binding. However, if a borrower defaults on a promissory note and does not repay, the lender can legally possess any property that the individual promised as collateral.

What Can Void a Promissory Note?

There are some circumstances that can cause a promissory note to become null and void. Here are some potential pitfalls to avoid.

Not signed by the borrower

In order for a promissory note to be legally binding, it must include the signature of the borrower.

You generally are not required by law to have the signatures witnessed or notarized. However, these two steps can add a layer of protection – particularly if the two parties do not know and trust each other.

Unclear clauses

If the clauses or the terms of a promissory note are not written clearly, the contract may not be valid. You can ensure you use the correct terminology by downloading a template for a promissory note from Lawdistrict.com.

Unfair terms

A promissory note must also offer fair terms in order for it to be legally binding. For example, most states limit the amount of interest that can be charged on different kinds of loans. Therefore, an unusually high-interest rate could invalidate a promissory note.

Losing the original note or a copy

A third factor that could invalidate a promissory note is if the original document is lost or if it has been altered without both parties agreeing (and signing off) to the changes.

The original copy of a valid promissory note is usually held by the lender, but the borrower should also keep a copy of the signed document. If the borrower does not repay the loan, the lender can pursue appropriate legal action. Once the debt has been fully repaid, the lender should date and mark the promissory note as “paid in full.”

What Makes a Valid Promissory Note?

Now that we know what can invalidate a promissory note, let’s look at all the components that make it valid and legally binding. Here is a list of the basic elements a promissory note should include:

  • The full names of the lender and borrower
  • The addresses of the lender and borrower
  • The amount of money being borrowed
  • Details on any collateral being used
  • Payments terms, including how often and what amount
  • What happens if there is a default in payment
  • Any miscellaneous provisions
  • Signatures of both parties

Promissory notes for complicated transactions (such as car loans and mortgages) will also include interest rates, amortization schedules, and other details pertinent to that loan agreement.

Read more: Promissory Notes Vs. Loan Agreements

There are two main categories of promissory notes:

  • Simple promissory note. A simple promissory note is typically used for a lump sum repayment by a specific date. For example, let’s say you lend a family member $1,000 with the agreement that it is to be repaid by December 1. With a simple promissory note, the full amount of $1,000 is due on that date, with no payment schedule involved. Depending on the terms of your agreement, there may or may not be interest charged on the loan amount.
  • On-demand promissory note. With a demand promissory note, there is no set date for repayment of the loan. The lender determines when the borrower needs to repay the money. In most cases, the lender must give the borrower a reasonable amount of notice. An on-demand promissory note is best suited for small loans when there is a foundation of trust between the lender and the borrower. For example, a loan for your niece’s first car. The flexible repayment deadline allows the borrower to repay the loan when they are able to. As with the single promissory note, interest may also be included in an on-demand promissory note.

Read more: How to Write an Effective Demand Letter

It’s important to note that you can also customize a promissory note to fit a specific lending arrangement. However, whether you’re drafting a simple promissory note, a demand promissory note, or a customized note, it’s a good idea to refer to a verified template. This way you use the correct language when creating your document, and you won’t encounter any unpleasant surprises that could lead to a breach of contract.

You can create a legally valid and enforceable promissory note in just a few minutes at Lawdistrict.com.

Helpful Resocurces:
Promissory Notes - Investor.gov
Promissory Note Fraud - SEC.gov

A Promissory note is a contract, which means that it is legally binding. However, it must include certain conditions to ensure it is enforceable.

As with any other common law contract, a promissory note should contain all the necessary terms and conditions that are part of the agreement between the two parties that are involved.

A promissory note must include the date of the loan, the dollar amount, the names of both parties, the rate of interest, any collateral involved, and the timeline for repayment. When this document is signed by the borrower, it becomes a legally binding contract.

The lender may also sign the promissory note, but unlike loan agreements, they are not usually required to do so. However, the lender may require the borrower to sign the document in the presence of a notary. This helps to guarantee the signature.

Promissory notes can also be secured by collateral, but even if they aren’t, they are still legally binding. However, if a borrower defaults on a promissory note and does not repay, the lender can legally possess any property that the individual promised as collateral.

What Can Void a Promissory Note?

There are some circumstances that can cause a promissory note to become null and void. Here are some potential pitfalls to avoid.

Not signed by the borrower

In order for a promissory note to be legally binding, it must include the signature of the borrower.

You generally are not required by law to have the signatures witnessed or notarized. However, these two steps can add a layer of protection – particularly if the two parties do not know and trust each other.

Unclear clauses

If the clauses or the terms of a promissory note are not written clearly, the contract may not be valid. You can ensure you use the correct terminology by downloading a template for a promissory note from Lawdistrict.com.

Unfair terms

A promissory note must also offer fair terms in order for it to be legally binding. For example, most states limit the amount of interest that can be charged on different kinds of loans. Therefore, an unusually high-interest rate could invalidate a promissory note.

Losing the original note or a copy

A third factor that could invalidate a promissory note is if the original document is lost or if it has been altered without both parties agreeing (and signing off) to the changes.

The original copy of a valid promissory note is usually held by the lender, but the borrower should also keep a copy of the signed document. If the borrower does not repay the loan, the lender can pursue appropriate legal action. Once the debt has been fully repaid, the lender should date and mark the promissory note as “paid in full.”

What Makes a Valid Promissory Note?

Now that we know what can invalidate a promissory note, let’s look at all the components that make it valid and legally binding. Here is a list of the basic elements a promissory note should include:

  • The full names of the lender and borrower
  • The addresses of the lender and borrower
  • The amount of money being borrowed
  • Details on any collateral being used
  • Payments terms, including how often and what amount
  • What happens if there is a default in payment
  • Any miscellaneous provisions
  • Signatures of both parties

Promissory notes for complicated transactions (such as car loans and mortgages) will also include interest rates, amortization schedules, and other details pertinent to that loan agreement.

Read more: Promissory Notes Vs. Loan Agreements

There are two main categories of promissory notes:

  • Simple promissory note. A simple promissory note is typically used for a lump sum repayment by a specific date. For example, let’s say you lend a family member $1,000 with the agreement that it is to be repaid by December 1. With a simple promissory note, the full amount of $1,000 is due on that date, with no payment schedule involved. Depending on the terms of your agreement, there may or may not be interest charged on the loan amount.
  • On-demand promissory note. With a demand promissory note, there is no set date for repayment of the loan. The lender determines when the borrower needs to repay the money. In most cases, the lender must give the borrower a reasonable amount of notice. An on-demand promissory note is best suited for small loans when there is a foundation of trust between the lender and the borrower. For example, a loan for your niece’s first car. The flexible repayment deadline allows the borrower to repay the loan when they are able to. As with the single promissory note, interest may also be included in an on-demand promissory note.

Read more: How to Write an Effective Demand Letter

It’s important to note that you can also customize a promissory note to fit a specific lending arrangement. However, whether you’re drafting a simple promissory note, a demand promissory note, or a customized note, it’s a good idea to refer to a verified template. This way you use the correct language when creating your document, and you won’t encounter any unpleasant surprises that could lead to a breach of contract.

You can create a legally valid and enforceable promissory note in just a few minutes at Lawdistrict.com.

Helpful Resocurces:
Promissory Notes - Investor.gov
Promissory Note Fraud - SEC.gov