Promissory Note Information
A Promissory Note is also known as:
- IOU
- Notes Payable
- Demand Note
- Commercial Paper
What is a Promissory Note?
A Promissory Note documents the legally binding promise that a borrower makes to pay back a loan under certain terms and conditions. However, unlike an IOU that simply acknowledges a debt amount, a Promissory Note goes into detail about the consequences of failing to repay a loan. For instance, this form typically includes details of the original loan amount, any applicable interest rates or late fees, a repayment plan, and collateral security.
What are promissory notes used for?
Customize LawDepot's Promissory Note template to suit a variety of purposes, including:
- Business loans, such as capital for a startup business
- Purchases, such as a vehicle, boat, or furniture
- Real estate loans, such as a down payment on a home
- Student loans for tuition and other educational expenses
- Personal lending between friends or family for debts or bills
How do I write a Promissory Note?
The information you'll need to write a Promissory Note includes:
- Party details: Identify the lender and borrower. The lender may be a corporation or an individual. You may also include a co-signer who agrees to pay the debt if the borrower defaults on the loan.
- Loan amount: Specify how much money the lender will loan.
- Payment plan: Create a repayment schedule, including whether the borrower may repay the loan in a single payment or regular payments, when the final amount is due, and if the borrower can repay the loan early or in lump sums.
- Interest and late fees: If the lender charges interest, they may specify the percentage of interest and how often it’s compounded (monthly, every six months, or yearly). The lender may also penalize overdue payments by charging late fees or increasing the interest rate.
- Collateral and insurance: A borrower may use collateral to secure the loan. If the borrower defaults, the lender seizes the collateral. Collateral may be a vehicle, jewelry, or other assets. The lender may also require the borrower to obtain insurance if the loan is for a vehicle.
Should I use a Promissory Note or Loan Agreement?
People typically use Promissory Notes for loans that come from non-traditional money lenders like individuals or companies instead of banks or credit unions. These short- or long-term loans often help people achieve various personal and business goals.
A Loan AgreementLoan Agreement is more comprehensive than a Promissory Note and includes clauses about the entire agreement, additional expenses, and the process for amendments (i.e., how to change the terms of the agreement). Use a Loan Agreement for loans of a large amount or that come from multiple lenders.
