Free Promissory Note Template

A Promissory Note is a note payable form whereby a borrower promises to repay the lender. 

Promissory Notes have much in common with loan agreements, but the former only binds the borrower and is more informal. They function similarly to IOU notes, detailing information about what one person owes another.

However, Promissory Notes are legally more robust and enforceable, and provide much better protection for lenders.

Types of Promissory Notes

Different types of Promissory Notes exist. Depending on your situation, one kind may be more suitable than the other. 

There are 2 basic types of Promissory Notes: 

• Secured Promissory Note: This type of Promissory Note is used when the lender wants to secure collateral, for example, a vehicle or television. If the borrower does not pay back the money in time, the lender has the right to claim the property. 

• Unsecured Promissory Note: If you do not want to secure the loan with any collateral, you should use an unsecured Promissory Note. In this case, if the borrower does not pay back the money, the lender must file in a small claims court.

Promissory Notes are mostly employed for small loans between close family and friends. 

The following are additional circumstances when Promissory Notes can be appropriate:

• Real estate loans. If the borrower fails to honor the agreement, the lender can legally enforce the appearance of the default payment in public records, consequently affecting the borrower’s credit. 

• Debt loans. Typically used between friends or family members, they can help avoid unforeseen conflicts.

• Business loans. Employed to borrow money from corporate lenders such as banks and financial institutions. Lenders have the right to attach liens on borrower assets until payment is made.

• Student loans. Issued for education purposes, they are called master Promissory Notes.

• Vehicle loans. Lists the payments the borrower needs to make to get full ownership of a car. It includes all the information related to the vehicle, including model and year.

• Other loan types. They include corporate investment. If the borrower cannot return the agreed amounts, the lender becomes the owner of the company. 

Using a legal template allows you to document essential details. This includes the parties involved, when the money must be repaid, and any interest that should be paid on the capital that has been borrowed.

Promissory Note Fraud

As with many financial tools, Promissory Notes can be the subject of fraudulent activities. Specifically, scams involving business and investment Promissory Notes have significantly increased during the last few years.

With the promise of high returns, scammers have been able to defraud millions of dollars with illegitimate Promissory Notes. Examine the following recommendations to avoid falling victim to fraud:

• Beware of exaggerated promises. If the promised returns are above market and sound too good to be true, they probably are.

• Be cautious with guarantees. If the seller claims the operation is risk-free or has guaranteed returns, it is a clear indication you could be dealing with a fraudulent Promissory Note.

• Confirm licenses and registration. Legitimate Promissory Notes must be registered with your state securities regulator. Make sure the seller is licensed and listed there too.

• Consider if you were contacted first. Business and investment Promissory Notes are not typically offered to the masses. As complex legal instruments, it is experienced buyers who are customarily involved.

Promissory Notes may be more informal than full-blown loan contracts and financing agreements, but they still  must be carefully drafted. As an enforceable legal document, attention should be paid to how it is worded.

Use clear and plain English to draft the document, and cover essential information such as the parties' names and when payment will be due.

A successful Promissory Note contains the following details:

• Lender and borrower names

• The loan amount

• A payment plan (one or several installments)

• Whether interest will be paid on the principal

• If collateral will secure the loan

• The consequences in case of payment default

To correctly add this information to your Promissory Note, follow these steps:

1. Mention the parties: Provide the full names and complete addresses of the borrower and the lender.

   

2. Include the loan amount: Add the principal sum (amount being loaned) and the interest rate, if applicable.

   

3. Explain payment terms: State the day when the loan amount must be paid back, and if it will be paid in one lump sum or installments.

   

4. Choose a secured or unsecured loan: Select if there will be any collateral and late fees involved.

   

5. Decide to include a co-signer or not: Decide whether there will be any co-signers.

   

6. Mention the Governing Law: Add which state’s laws will govern the Promissory Note.

   

7. Sign the Note: Sign the Promissory Note along with the other party and co-signers or witnesses.

   

Our promissory note template and step-by-step survey will help you create a legally binding and professional document that looks the part and works effectively.

It will help you identify the key information that must be found within your form for it to be valid and enforceable.

Our Promissory Note template and step-by-step survey will help you create a legally binding and effective professional document.

It will help you identify the key information that must be found within your form to be valid and enforceable.

How to Sign a Promissory Note

Once you have customized your Promissory Note, both parties must sign it. Only then will it be considered legally valid.

Complete the following actions before signing your document: 

1. Evaluate if you require witnesses: In most cases, it is not a requirement. However, certain jurisdictions demand witnesses or a notary public to be present. 

2. Fill in the date: Ensure the date is filled in at the moment of signing. 

3. Sign the document: Both parties must sign the Note and include their printed names. 

4. Provide copies: All parties should keep copies of the Promissory Note. 

Confirm that your Promissory Note complies with state laws and requirements before you sign the document.

Similar to loan agreements, loans secured through a Promissory Note can demand interest on the principal amount. 

Interest protects against borrower payment default, especially if the loan is not secured against any collateral and spreads over a long period.

When using debt instruments that levy interest, it’s important to remember that state usury laws apply. Take this into account when drafting your Promissory Note.

Usury Laws by State

If you have decided to charge interest on the loan amount, ensure you adhere to state laws and regulations.

Refer to our table below to confirm the maximum interest rate in your state:

Once you have written a custom Promissory Note, you’ll need to sign it along with the other party so that it can be considered legally valid.  

To ensure that you sign your legal document correctly, you must complete the following steps. 

1. Review if you require witnesses: In general, you won’t need any witness testimonies. However, certain jurisdictions have witness requirements or require that a notary public witnesses the signing. 

2. Fill in the date: If you haven’t done so already, ensure the date is filled in at the moment of signing. 

3. Sign the document: Both you and the other party must then sign the Note, along with your printed names. 

4. Provide copies: Both you and the other party should receive and keep copies of the Promissory Note. 

Before signing the Promissory Note, or any legal document, ensure you review and follow all the requirements of the state’s laws that you are signing your Note in.

Once the debtor has fully repaid the principal amount and interest, complete a Promissory Note release form and provide a copy to the borrower.

This legal form serves as a formal receipt that the debtor has honored the agreement described in the note, releasing them from any further obligations and liabilities.

What to Do if the Borrower Defaults

It is essential to be prepared in the event that the borrower defaults on the loan and does not repay the planned installments. 

The situation must be handled carefully to find an adequate solution. 

Consider these options in case of borrower default: 

• Have a conversation with the borrower to understand the problem. 

• Provide the borrower with a copy to review the agreed-upon terms. 

• Send them a Demand for Money Owed letter by certified mail if the borrower doesn’t comply. 

• Collect all the evidence, including any proof of conversations with the borrower. 

• Think about using a debt settlement agreement to recover losses. 

If none of these measures work, you should consider suing the borrower in court to recover the money. 

When writing a Promissory Note for the first time, it can help to see a real example first. This will assist you in getting a feel for the structure and terminology.

Check our Promissory Note example document below to get a better idea of how your final form should turn out.

A Promissory Note can prove practical in many situations. Should your circumstances change, you may find these other documents related to loans helpful:

• Loan Agreement

• Bill of Sale

• Service Agreement

• IOU