A promissory note is a written promise to repay money on stated terms. Putting a loan in writing protects the lender and clarifies expectations for the borrower, even when the people know each other well.
What to include
- Names of the borrower and lender and the date.
- The principal amount.
- Interest rate, if any, and how it is calculated.
- Repayment schedule: lump sum or installments, and due dates.
- Late fees or what happens after a missed payment.
- Whether the loan is secured by collateral.
- Signatures, and a co-signer or guarantor if used.
Secured vs. unsecured
An unsecured note relies on the borrower's promise alone. A secured note gives the lender a claim on specific property, such as a car, if the loan is not repaid, which usually requires additional documents.
Interest and tax pitfalls
States set maximum interest rates, called usury limits, and charging more can make a loan unenforceable. For larger loans between family members, tax rules may treat very low or zero interest as a gift or require interest to be counted for tax purposes, so ask a tax professional.
If the borrower does not pay
You can send a demand letter and, if needed, sue, often in small claims court for smaller amounts. A clear signed note makes your case far stronger.
Frequently asked questions
Does a promissory note need to be notarized?
Usually not, but notarization can help prove it is genuine.
Can a note be forgiven?
Yes, if the lender releases the debt in writing. Forgiveness may have tax consequences.