How to Write a Promissory Note: 11 Steps with Pictures

how to write a promissory note

In some cases, digital copies may not be considered legally adequate. It’s important to understand that a promissory note requires precision and accuracy since it’s a legal document. Any errors in its content might lead to misunderstandings, or worse, legal penalties. As such, if you’re unsure, it’s recommended to seek professional or legal advice before proceeding. A demand letter is the legal tool you can use to collect the outstanding balance on a demand promissory note.

Signing Requirements

You might, for example, choose to use a simpler loan agreement, which might contain fewer terms or lack the ability to transfer it to another party. Furthermore, a promissory note secures the lender’s interests by legalizing the terms of the loan. It may spell out specific consequences if the buyer defaults on the loan or any collateral used to secure the loan. If you’re lending money, it describes exactly how you expect to be repaid, and it helps you enforce your rights if the borrower doesn’t pay.

how to write a promissory note

How to Write a Promissory Note Sample

Accrued interest is determined by multiplying the loan’s outstanding balance by the interest rate and compounding it daily or monthly, thus increasing the total debt. This interest is added to the loan’s principal, raising the amount due. Fixed interest rates are set at the time the loan is issued and remain the same for the duration of the loan. Variable interest rates, on the other hand, are changed or revisited at predetermined times throughout the loan’s lifetime and are often based on current market norms. If there are questions, hash them out before you sign the contract, and include the answers in writing.

How Do Promissory Notes Work In Real Estate?

Short-term loans between friends and family members are usually unsecured. A promissory note is a legally binding document, just like a contract. It can be upheld in a court of law if both parties have signed the note. As the root of the word suggests, it is a certificate of an official and legally-binding promise.

I am a partner in Alliance Law Firm International PLLC in Washington. I have worked on building and managing companies in technology, energy, materials, retail, and natural resources.I am licensed to practice in the District of Columbia and Pennsylvania. I have degrees from the Georgetown University Law Center (JD) and the Yale School of Management (MBA). Show your commitment and good faith to buy a property with an earnest money promissory note. The lender keeps the original promissory note and the borrower should receive a copy. Keep the promissory note with your other important papers, so you can find it if you need to.

The signatures show that both parties have consented to the terms of the note. In some cases, banks may accept promissory notes as a means of helping you to qualify for a mortgage or loan. Find out what’s included in a promissory note, how to write one, and download a free template. The mandatory signatures under a promissory note are those of the borrower and a witness. As to the signature of the lender, the legislations in various states differ. In some of them, the lender isn’t obliged to do that since (s)he is under no commitment under the note.

  1. The borrower may also face financial repercussions for failing to repay the loan, including wage garnishment.
  2. If you are unsure about the most effective procedures for storing such key documents, it’s always a good practice to seek professional advice.
  3. Despite struggling to keep up with payments due to the high rate, Sarah is unaware that her state’s usury laws cap interest rates at 10% per month.
  4. An unsecured promissory note does not come with upfront collateral requirements, though you’re still obligated to repay the loan.
  5. For example, if someone, like a relative, who did not take out the loan for the mortgage signs the note, it would be deemed invalid because the legal borrower did not sign.

If you’ve ever taken out a loan, you have probably signed a promissory note. A promissory note defined is a legal document that is a promise of payment. Here, we’ll examine what is a promissory note and discuss how they relate to real estate. An unsecured promissory note does not come with upfront collateral requirements, though you’re still obligated to repay the loan. If the loan isn’t repaid, the lender can file a lawsuit or send the borrower’s unpaid debt to a debt collector.

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A promissory note will include the agreed-upon terms between the two parties, such as the maturity date, principal, interest, and issuer’s signature. Essentially, a promissory note allows entities other than financial institutions to provide lending services to other entities. In this case, if the borrower doesn’t repay the loan, the lender can try to use standard debt-collection procedures. Additionally, it’s essential to specify the mode of repayment, be it by check, money order, electronic transfer among others. Furthermore, the promissory note should include what would happen in case of late or missed payments such as late fees or potential legal actions. Promissory notes don’t have any legal requirements, and some people write them themselves for simple purposes.