Promissory Note in minutes

What is a Promissory Note?

A Promissory Note is a written promise from one party, the borrower, to repay a specific sum of money to another party, the lender, either on demand or according to an agreed schedule.

It sits between an informal IOU and a full loan agreement: simpler than a bank contract, but detailed enough to record the amount, interest, repayment terms, and what happens if the borrower does not pay.

When do you need one?

Any time money changes hands as a loan rather than a gift, a promissory note protects both sides. Common cases include:

• Lending money to a family member or friend
• Financing part of a private car or equipment sale
• A small business borrowing from an owner, partner, or investor
• Lending a down payment or helping with a large purchase
• Converting an unpaid debt into a clear written repayment plan

Types of Promissory Notes

The right structure depends on how and when the loan should be repaid. We tailor the note to the type you need, including:

• Installment: repaid in regular payments over a set period
• Lump sum: the full balance repaid on a single due date
• Demand: repayable whenever the lender requests it
• Secured: backed by collateral the lender can claim on default
• Unsecured: based on the borrower's promise alone, no collateral

What to include

A complete promissory note leaves no room for doubt about who owes what and when. Make sure yours covers:

• Full names and addresses of the borrower and the lender
• The principal amount being loaned
• The interest rate, if any, and how it is calculated
• The repayment schedule and final due date
• Late fees and what counts as default
• Any collateral securing the loan
• Signatures and the date of signing

Interest and repayment terms

Spell out exactly how the loan is repaid: the payment amount, how often payments are due, when the first payment starts, and whether the borrower can pay early without penalty.

If you charge interest, state the annual rate clearly and keep it within your state's usury limits, the legal maximum a private lender may charge. Even between family members, a modest documented rate helps show the money was a real loan and not a gift.

Common mistakes to avoid

• Leaving the loan as a verbal agreement with nothing in writing
• Skipping the repayment schedule and hoping it works out
• Charging interest above your state's legal limit
• Forgetting late fees or what happens on default
• Not keeping a signed copy for both the borrower and the lender