A promissory note is a promise to pay back a loan but is different from a loan agreement or mortgage note. While all three record a loan, the loan agreement provides a more detailed account of the loan transaction. A loan agreement contains important information and clauses dictating repayments, disputes, etc. A promissory note is simply a formal promise that the borrower will repay the loan.
Moreover, choice templates usually come in a flexible format, like a promissory note PDF, making access and revision straightforward. This judicious method is undoubtedly an intelligent option for vigilant borrowers and lenders alike. Promissory notes are promises to pay a specific amount within a specific timeframe. Both parties must sign this document to guarantee the borrower will repay the lender on that date. Whether between individuals or between entities, a promissory note records a loan. Simple promissory notes ensure clarity about due dates for payments and payment amounts by putting all relevant details in writing.
If you are lending a large amount of money to someone (or to a business), then you may want to create a promissory note from a promissory note template. This note will be a legal record of the loan and will protect you and help make sure you are repaid. In summary, creating a promissory note is an important step if you’re lending money to someone. By having a written agreement in place, you can protect yourself and ensure that the borrower understands their obligations. Although promissory notes are often simple, they should include the names and addresses of the lender and borrower.
How Promissory Notes Work
- A promissory note is a contract that spells out the terms of a loan.
- Keep in mind that each state has its own laws about the maximum interest rate you can charge on a loan.
- Note, however, that there can also be financial consequences for the lender when the borrower defaults on a loan.
- All parties involved should sign the promissory note for it to be valid.
We’re most familiar with using promissory notes when we take out a personal loan, a student loan or some other sort of credit from a bank or lender. Often, we simply lend them money with an unofficial or even verbal IOU. An unsecured promissory note is a promissory note that is written without any collateral. Unsecured notes may be used with small sums of money where there is less risk of the borrower defaulting. The note acts as a formal promise to pay whatever funds are owed, either on-demand or by a specified date. Promissory notes may be used when businesses borrow money from private/alternative lenders or even financial institutions in some cases.
The Art of the Promise: How to Write a Promissory Note
A promissory note can last three to 15 years, depending on the jurisdiction. Its statute of limitation is generally the same as that of other written agreements. Therefore, usury rates refer to the practice of charging excessively high-interest rates on loans, often exceeding legal limits. Furthermore, every party to the note should receive a copy, and the lender should store the original securely. If the borrower’s financial stability is questionable, the lender may demand a cosigner with good credit as a safety net for the promissory note.
This legal area is considered to be within the jurisdiction of states. State laws are pretty much similar in their form and content, so you can make use of standard printable promissory note templates available at PandaDoc. That said, we still recommend consulting local legislation because in some minor aspects (like whether the lender must sign the note or not), the states may differ. There are several different structures for repayment of a promissory note, but most involve repaying the principal plus interest.
Where to get the promissory note template?
But if you’re going to lend someone a few hundred or thousand dollars, you’ll want to make sure you have a formal promissory note written so everyone is in agreement on the loan terms. You should use a promissory note every time you lend someone money that you’d like to be repaid. On the other side, it’s also beneficial to sign a promissory note anytime you borrow money from someone.
Promissory notes are typically used for more informal arrangements between friends and family members or very small businesses. It is crucial to include default and late payment provisions in a promissory note. This specifies the consequences of missed payments or default on the loan, how to write a promissory note which can include the imposition of late fees, interest rate hikes, or legal action. Secure your finances with an unsecured promissory note (lump-sum payment).
The other party can use the promissory note much like they would cash or any other investment, and they can transfer it at any time. Keep in mind that each state has its own laws about the maximum interest rate you can charge on a loan. These are known as usury laws, and you’ll need to check them to make sure your loan interest rate is legal if you’ll be charging interest. A check can be deposited directly into your bank account, while the money from a promissory note can only be obtained directly from the debtor.