Start a promissory note to formalize a loan and create security for a lender issuing money to a borrower. Create your own debt note easily today with step-by-step instructions and form builder tools.
What is a Promissory Note
A promissory note is a note payable form whereby a borrower promises to repay someone who has issued a loan to them. It has much in common with a loan agreement, although it differs in that it creates a more informal agreement that only binds the borrower and not the lender.
It functions in a very similar way to an IOU note, detailing information about what one person owes another. However, Promissory notes are overall much more robust and legally enforceable, providing much better protection for lenders issuing loans.
When to Use a Promissory Note
A promissory note can be used in many situations. In most cases, they are utilized for small loans and lending between close family and friends. However, it can also be used for:
Real estate loans and mortgage down payments
Using a legal document such as allows you to document essential details. This includes information such as the parties involved, when the money must be repaid, and any interest that should be paid on the capital that has been borrowed.
How to Write a Promissory Note
Promissory notes may be more informal than full-blown loan contracts and financing agreements but they must still be carefully written. This is still an enforceable legal document and therefore care should be taken in how it is worded.
The document should be written in clear and plain English, using full sentences. It needs to also adequately cover the key information that helps identify all the parties in the agreement and that documents when payment will be due.
A successful promissory note will usually include the following details:
The names of the lender and the borrower
How much money is being lent
How the money will be repaid (either all at once or via a repayment plan)
Whether interest will be paid on the borrowed money
Whether any collateral will secure the loan
What will happen if the borrower defaults
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.
Calculate Loan Interest Rate
Loans that have been bound by a promissory note can charge interest on the principal sum of money like those secured with loan agreements. Adding interest is highly advised to protect against the borrower defaulting and the money not being paid, especially if the loan is not secured against any collateral and is longer-term in nature.
However, it’s important to remember that state usury laws apply when using debt instruments that levy interest. This is also true for your promissory note and could be a factor when creating your own document and charging interest.
Usury Laws by State
Each state has its own usury laws and these must be followed in order for a promissory note, or indeed any debt instrument, to be legally valid. If you have decided to charge interest on the loan amount, make sure to adhere to these rules.
If you’re unsure what the maximum interest rate in your state is, be sure to refer to our table below with the details on what can be charged in each area.
|State||Law||Maximum Interest Rate|
- 10% for personal, family, and household loans
- The higher of 10% or 5% over the amount charged by the Federal Reserve Bank of San Francisco
- 10% interest rate
- Can be higher if the loan is provided by contract law
- 18% on loans below $500,000
- 25% on loans over $500,000
|New York||Gen. Oblig. § 5-501 & Banking § 14-A||
- 6% legal interest rate
- 16% general usury limit
|Pennsylvania||41 P.S. § 201||- 6% interest rate|
|Illinois||815 ILCS 205/4||- 9% general usury limit|
|Ohio||§ 1343.01||- 8% interest rate in any written contract|
- 5% per month on amounts over $3,000
- 7% without a written contract
- 16% on loans under $3,000
|North Carolina||§ 24-1||
- 8% legal rate
- Consumers and creditors are allowed a higher contractual rate
- 5% legal rate
- 7% with a written contract
|New Jersey||§ 31:1-1||
- 6% without a written contract
- 16% with a written contract
- 6% legal rate
- 12% with a contract
Release of Promissory Note
Once the principal amount that was loaned is fully repaid and any interest owed is covered by the debtor to the creditor, the loan can be formally released. For this to happen, a promissory note release form can be completed and given to the borrower.
This form provides a formal receipt and shows that the original promise within the promissory note has been fulfilled. From this point onwards, the borrower is no longer under any obligation to the original debt note.
Promissory Note FAQs
It’s important to be fully clear on what your promissory note should contain and cover before starting your own document. If you’re still unsure of some of these details, read through our FAQs below to learn more about their uses and essential inclusion.
What is Included in a Promissory Note?
A promissory note briefly summarizes the key points of a promise to pay a sum of money. This includes details such as how much money is being lent, who the lender and borrower are, when the loan must be repaid, how much is being charged, and whether any collateral will secure the loan, etc.
Do I Need Witnesses to Sign the Promissory Note?
It isn’t necessary or obligatory to have the signing of your promissory note witnessed. However, this can be a requirement for some lenders before they agree to extend a loan.
This is because witnessing usually adds more legitimacy to the signing of your debt note. It ensures that all parties are fully aware of what they are signing and that they agree fully to the terms of the contract.
Does a Promissory Note Need to be Notarized?
No, promissory notes do not require notarized signatures. However, a lender or borrower can still choose to do this to add extra security and certainty to the signed document and ensure that it has the maximum legal enforceability possible.
What Makes a Promissory Note Invalid?
Like most signed agreements and contracts, promissory notes must follow state and federal financial and legal regulations or they may be determined to be invalid. Breaching usury laws, losing all copies of the note, including false or incorrect information, and being unable to prove legal ownership of the debt could nullify your agreement.
Where Can I Get a Promissory Note Template?
It is possible to create your very own promissory note online using our expert template designer and step-by-step guidance. Our pre-prepared layout can be easily filled in using your own information in less than half an hour, which can then be used to create a quick and binding agreement with someone who will owe you money.
Alternatively, you can pay an attorney to draw up this document for you before issuing your loan.