A Promissory Note is a binding document that outlines a borrower’s legal promise to repay a loan to a lender. It’s often simply referred to as a note. 

Unlike an I.O.U. — which only acknowledges a debt amount — a Promissory Note outlines the terms and conditions of the loan and the consequences of failing to repay it. The key components of a note include the loan amount, interest rate, late fees, and repayment plan. 

Promissory Notes can be secured or unsecured:

• Secured Promissory Notes are used when collateral assets back a loan. Collateral helps ensure repayment. If a borrower doesn’t repay a loan, the lender claims ownership of the collateral property as repayment.
• Unsecured Promissory Notes are used for loans without collateral assets. If a borrower doesn’t repay a loan, the lender can seek legal action to collect the unpaid debt.

LawDepot’s Promissory Note template is available to create a secured or unsecured note for personal or business loans. For example, say you loan a cousin money to help with their small business debts. Your note can be secured and include details on any collateral and late fees to give you peace of mind for repayment. 

A Promissory Note should be used when a sum of money is being lent to family, friends, or a business. Either the lender or the borrower can create one to sign with the other party.

More specific examples for when a Promissory Note should be used include lending money for:

• Business costs, such as one business loaning money to another to develop a new product or service
• Debts or bills, like lending money to family to help with final demand bill payments
• Real estate purchases, such as lending money for a down payment to help purchase a new home
• Vehicle purchases, like lending a sum of money to a friend as an auto loan to purchase a new car, or to cover repairs for their current one

In some cases, it might make more sense to use a Loan Agreement instead of a Promissory Note. Loan Agreements are more comprehensive and can include clauses that allow smoother, mutually agreed-upon terms for the loan. Lenders usually use them for loaning larger sums of money.

Note: For real estate mortgages, use LawDepot’s Mortgage Agreement to document specific terms and conditions, including using a property as collateral.

Yes, you should use a Promissory Note whether you’re the lender or borrower involved in a lending situation. It protects both parties by giving clear terms regarding loan repayment.

Verbal agreements can be valid, but details discussed in a conversation can easily be forgotten by either party. The benefits of writing a Promissory Note include:

• Customizable to fit each loan’s unique terms, with flexible and negotiable payment options
• Reduces confusion and disputes by clearly outlining the agreed-upon terms
• Preserves relationships with family, friends, and colleagues by setting clear expectations
• Serves as legal proof of the loan’s terms and conditions if action is needed to recover payments (e.g., late repayment, interest charges, or other remedies)

A Promissory Note also assists in securing repayment by having a co-signer when it's applicable. A co-signer is a third party who agrees to take responsibility for the borrower’s debt if they fail to make payments or breach the terms of the agreement. It’s important that anyone co-signing a loan knows the liability involved with the role. 

Yes. A Promissory Note is a legally binding contract if it meets your jurisdiction’s legal requirements. To be valid, a Promissory Note should include:

• Names and signatures of both parties
• Principal loan amount
• Repayment terms and schedule

State-specific legal requirements

Promissory Note laws vary by state and may include:

• Usury rates (interest rate limits)
• Statutes of limitations for enforcing late payments

For example, the California Department of Justice says debt collection typically has up to four years after the final due date to seek legal action for outstanding payments. Florida Statutes, on the other hand, state that the statute of limitations for action is five years.

What happens if a lender or borrower dies?

If a lender passes away, the borrower is still responsible for paying the loan, and the payments go to the lender's estate. If the borrower passes away before paying off their loan, their assets are used to repay the outstanding debt, or their co-signer is responsible for the remaining payments.

Whether you are the lender or borrower, include your Promissory Note in your Last Will and Testament to ensure any outstanding debts are properly addressed in the estate settlement process.

What makes a Promissory Note invalid?

A Promissory Note will be considered invalid if it's incomplete or the terms violate state or federal laws. Examples of when it will be deemed invalid include:

• The document is missing required signatures
• Interest rates exceed state limits
• There are ambiguous or unfair terms in the contract
• Clauses try to enforce illegal activities
• Unauthorized alterations have been made to the document
• The party seeking to enforce it cannot prove its existence or original terms

A Promissory Note will also be invalid if either party creates the document based on fraud or misrepresentation, or if either party lacks the capacity to enter a contract.

You can write a legally valid Promissory Note online using LawDepot’s customizable template. First, select whether you’re lending or borrowing money, and follow these easy steps to complete, download, and save your Promissory Note PDF.

Step 1: Document the loan details

Add essential details regarding your loan. This includes:

• Selecting the purpose of the loan
• Selecting the location where the loan is taking place
• Inputting the loan amount and key dates
• Any interest that applies to the loan, and how often it will be compounded

Step 2: Outline the payments

Next, add all the key details about the loan’s payments. Begin by determining how the borrower will repay the loan and how often they will make payments. 

Continue adding the first payment date and payment schedule. A schedule can either be a specific final payment day or by the number of payments to be made. To expand payment details, include whether the borrower can make lump sum payments or repay the loans early.

Then, add the details for any late payments. This can be a late fee or interest rate increase that follows your state's laws.

Step 3: Identify both parties

Include both parties' details, like full names and addresses. A lender and borrower can be either an individual or a company. Include the full legal corporate name and address if either party is a company.

If anyone is co-signing the loan, their name and address must also be in your Promissory Note.

Step 4: Add the final details

Add details about any collateral backing the loan. It’s important to note that collateral should be personal assets or property, not real estate or land. 

To make a thorough Promissory Note, include any additional information relevant to the loan. For example, include any specific requirements the borrower must follow if the loan is repaid early (e.g., a legal fee or a certain number of months' worth of interest). 

Finally, add the signing details, including whether a witness will be present while all the parties sign the contract. 

State requirements to notarize a Promissory Note can vary. However, notarizing a Promissory Note can help strengthen both parties’ signatures and create further protection if a future dispute occurs. 

Easily notarize your Promissory Note from the comfort of your home with LawDepot’s Online Notary services.

The lender holds onto the original Promissory Note while it’s being repaid. This ensures they have the original document if the borrower fails to pay and further legal actions are necessary to recover the debt. 

Once a secured note is paid, the lender will need to cancel the Promissory Note by creating and signing a release or satisfaction of promissory note to remove the lien from the collateral. If a note is unsecured, it's still best practice to sign a release or satisfaction for both parties’ records.