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Promissory Note Templates

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A promissory note, or “promise to pay”, is a note that details money borrowed from a lender and the repayment structure. The document holds the borrower accountable for paying back the money (plus interest, if any).

Types

Secured Promissory Note – For the borrowing of money with an asset of value “securing” the amount loaned such as a vehicle or a home. If the borrower does not pay back the amount within the time-frame suggested the lender will have the right to obtain the property of the borrower.

  • Common Example – When money is loaned by a Pawn Shop. The borrower offers value in the chance the loan is not paid off by the time it is due. The Pawn Shop would then keep the “secured” asset as full-payment.

Unsecured Promissory Note – Does not allow the lender to secure an asset for money loaned. This means that if the payment is not made by the borrower that the lender would have to either file in small claims court or through other legal process.

By State

Related

I Owe You (IOU) – A receipt acknowledging a debt that is owed with no time-table for payment.

Loan Release Form – When the note has been paid-in-full, the lender should set the borrower free of all liabilities by authorizing a release form.

Table of Contents

What is a Promissory Note?

Promissory notes are a do-it-yourself contract that you fill out to “promise” payment to an individual or bank by a certain deadline. It’s sort of like a more detailed and legally-binding IOU. They’re important for holding the borrower accountable for paying back a loan from a private investor or bank. They are also useful for keeping documented records of the loan for all parties involved and for tax purposes.

How does a Promissory Note Work?

Promissory notes list out the terms for the loan a borrower has accepted. It includes the amount loaned, the parties involved, interest rate (often called usury rate) and the repayment schedule or date in which the entire loan and interest has to be paid. The idea of a promissory note is not that you simply “promise” to pay back the loan, but that you’ll actually have the cash flow to pay it off during the repayment period. Don’t let the name fool you and be left with empty promises of repayment. This document is essential in insuring yourself as the investor that you will get your money back with interest.

Often when you give out a loan as a private investor or other entity, you add interest over the repayment period that you expect to be paid with the original principle. However, maximum interest rates are set by the state. Each has their own usury laws to protect the beneficiary.

How to Calculate

It’s important to lay out all the numbers in the promissory note so that there’s no confusion between you and the beneficiary. The final total payout, total interest, and monthly payments are all things that you’ll need to include. To calculate these, you’ll need to know the principle being loaned, the length of the repayment period, and the annual interest rate. Here are the formulas you can use.

Total Interest Owed

Principle*Annual Interest Rate = Total interest Owed

(If the payment is monthly or quarterly, then divide the total above by the fraction of the year it will take to repay the loan. Example: Payment due in 3 months would require you to divide the total by 4 since it’s only a fourth of the year.)

Final Total Payment

Principle + Total Interest Owed=Final Total Payment

Monthly Payments

Final Total Payment/Payment Period=Monthly Payments

As you can see, the math doesn’t have to be difficult when writing out the details of a promissory note.

Creating a Promissory Note

Note Promissory notes tend to make people nervous. It’s a legally binding document, so it makes sense to want to do it right the first time. But unlike most contracts, promissory notes aren’t typically long and are actually quite simple. Lenders and borrowers don’t necessarily need any legal knowledge at all to be able to fill out a promissory note.

Since we provide you with the forms, all you really have to do is fill out the blanks. Here’s our quick and simple guide to having your promissory note ready in minutes:

1. Fill out the lender and borrower information—This includes both of your names, addresses, the principle being loaned, annual interest rate added to the interest, and the full date on which this contract is being made.

2. Include payment information— For this, you will want to fill out the date the final payment is due and whether the loan will be paid in installments or as a lump sum. If being paid in installments, include frequency of payments, payments due and late fees for not paying on time.

3. Mark secured or unsecured—If the lender wants some extra assurance of payment, then secured may be the best option to choose. This will give the lender the right to secure an agreed upon asset of the borrower if the debt isn’t repaid. Otherwise, check unsecured.

4. Have someone co-sign—A co-signer will act as a fallback and will owe the lender in the event the borrower can’t pay off all their debt. If one is necessary, include their name and information on the promissory note.

5. Authorize the document—Here, you just need to add the state the note is authorized in and which laws it will abide by. Then add the printed name, signatures and dates of both the lender and the borrower. Make sure to have a witness present during this process and sign off as well.

As you can see, writing a promissory note doesn’t have to be daunting. We hope that you’re now confident in your ability to write a promissory note that checks all the right boxes.

Usury Laws By State

Each state has their own Laws when it applies to the Usury Rate, which is the maximum rate of interest a lender can charge a borrower. It’s important that Lenders do not charge a rate of interest more than what their state allows. The following are links to each state’s Usury Rate Laws.

Key Terms & Clauses

Below are common Key Terms (definitions) and Clauses found in our Promissory Note.

Allocation of Payments – Describes how payments shall be made in regards to late fees, interest, and the principle. In our free promissory note, payments shall first pay off any late fees and interest before the principle is credited.

Prepayment – A clause detailing the rules of paying off the loan early, whether it’s the entire loan or individual payments. Some loans may require that the borrower pay a fee in order to “prepay” the loan.

Acceleration – In the event a borrower defaults on the note or on a provision within the note and does not cure the default within the allotted time frame, the lender has the option to demand immediate payment of all outstanding dues from the borrower.

Attorney’s Fees and Costs – The borrower must pay all monies incurred if defaulting on the loan results in the involvement of attorneys and court proceedings. However, if the borrower ends up prevailing in court, no matter the issue, the lender must then pay for all court related costs.

Waiver of Presentments – This is a short clause that implies that the lender does not have to demand payment when payments or the loan is due, the borrower holds the responsibility to make certain that the payments are paid when due. If the borrow does not pay when due, the lender must issue a notice of non-payment. Further, if the borrower refuses to pay the note, the lender shall have the notice of non-payment presented and notarized which may follow with legal proceedings.

Non-Waiver – If for any reason the lender fails or delays to exercise their rights under the terms of the note, it does not signify or deem that they are waiving their rights. For example: The lender delays in responding to the borrower about an upcoming payment due. The non-response by the lender does not give the borrower the right to not make payment on the due date.

Severability – A clause within a promissory note which states that if any provision within the note becomes void or unenforceable, it does not deem the entire note or any other provision within the note invalid.

Integration – States that no other document can effect the terms or validity of your promissory note. Only can your promissory note be amended (edited) if both the lender and borrower sign a written agreement.

Conflicting Terms – States that no other agreement shall have superior legality or control over your promissory note.

Notice – Describes how notices should be delivered to the borrower. It is standard practice for notices to be written and to be delivered either in person or by certified mail with copies and receipts.

Co-Signer – A person who guarantees the loan if the original borrower defaults on the note. Typically if the lender suspects a borrower to be risky, the lender may require the borrower to obtain another credible person to co-sign on the note.

Execution – States that the borrower is the Principal within the the note and severally liable for all dues. If there is a co-signer, both the borrower and the co-signer are equally responsible for paying back the loan.

How to Write a Promissory Note

Compared to other types of contracts and legal forms, a Promissory Note is far easier to understand. Most people, without any sort of legal knowledge, can understand the basics of this document and fill out on their own behalf. Below we show you how to complete our basic promissory note. This example will take place in the state of New York.

Step 1 – Lender & Borrower

  • Complete the Date by entering the day, month, and year. Proceed by entering the name of the Borrower and Lender. Follow with both of your mailing addresses (can be a personal or company address).
  • The lender must enter the principal amount of the loan in both words and numbers.
  • Submit the interest rate (percentage annually). In this example, we entered 16% because in the state of New York, 16% is the maximum allowed interest rate a lender can charge.

Step 2 – Payments

  • Complete the Date by entering the day, month, and year that the full balance of the loan is due. Include interest and late fees (if any).
  • You then have two options to select from – Paying back the loan with a Lump Sum or by Installments. Check the box indicating the agreed frequency of repayment and enter the amount. In our example we chose Monthly Installments. Since the loan is being charged 16% interest, the borrower will have to make payments every month in the amount of $97 dollars.
  • If you have selected Installments as your repayment option, enter a Late Fee amount in the event the borrower does not make their payments on time. In our example, we opted to make the late fee at a reasonable $25 dollars.

Step 3 –  Secure or Unsecure 

  • As a Lender, the safest type of promissory note to use is by selecting “Secure“. Most pawn shops use this method. In our example, the borrower has used their iPhone 7 as collateral to secure the loan with the Lender. In the event the borrower can’t pay back the loan, the Lender will keep the iPhone 7.
  • When planning to loan money to an individual or business, select “Unsecure“. It’s important to have some level of trust in your borrower if you plan to issue an unsecure note.

Step 4 – Co-Signer

  • Having a Co-signer ensures the loan will be payed back by another person even if the original borrower faults on the loan. You often see co-signers with Unsecure Promissory Notes due to the absence of collateral. In this example, we selected “No-cosigner” since the borrower took out a secured loan by using his iPhone 7 as collateral.

Step 5 – Governing Law

  • This is fairly an easy step. Simply enter the state that will govern your note (loan). This is particularly important due to the Usury Rates differing by state. The state of the individual or business lending the money (the lender) should be entered. In this example, the the lender resides in New York, therefore the state of New York was entered.

Step 6 – Signatures

  • The lender, borrower, and a witness should all come together when time comes to sign the note. If there happens to be a co-signer, notify that person to be present as well. Each person must sign, date and print their name in the presence of the witness.


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