Obtain a Notary Public’s seal for your Promissory Note

What are the types of promissory notes and are they right for me?

What is a Promissory Note?

A Promissory Note is a legal contract between a lender and a borrower that defines the terms of a loan, including payment details, interest, late fees, any collateral, and more. This agreement also outlines what will happen if the debt is not repaid. 

Easy to build, a Promissory Note is an effective way for any lender to record the terms and conditions of their arrangement with a borrower, whether a family member, friend or total stranger. By accepting this agreement, you and the borrower are more likely to hold the same set of expectations when it comes to repayment of the loan.

When to use a Promissory Note:

You plan to loan money to another person or business, and would like to formalize the agreement.

You’re looking to borrow money from a private party or a business, and you’d like to get all the terms in writing.

You’re involved in a loan that includes interest, and you wish to prepare an amortization table for both parties.

You need a written record determining the amount of a monthly loan payment.

You’ve been asked to create a Promissory Note on behalf of a lender and borrower to outline the terms of a loan.

What is a Promissory Note?

A Promissory Note is simply a loan agreement. It documents the amount loaned and how it will be repaid. It is often a personal loan between friends or family members, but it can be between businesses as well. This type of Note is a bit more formalized than an IOU or handshake agreement, but easier to obtain than a bank loan.

What is included in a Promissory Note?

Promissory Notes do not require a lot of information to make. The Rocket Lawyer document builder automatically generates the legal language for you, you simply need to submit a bit of information to customize it.

Information required to make a Promissory Note include:

Contact information: for the lenders and the one accepting the loan and co-signer if applicable

Interest rate: if interest will be changed, the interest rate and a higher rate after late payments if applicable

How payments will be made: installments plus interest, interest-only payments, lump sum or on demand

Frequency of payments: how many payments will be made, when payments will be made and balloon payment amount if required

Late fee: will they be charged and if so, when and how much

Collateral: if collateral will be applied you’ll need to write a description of the property

Loan sale: can the lender sell the loan?

Is a handwritten promissory note legal?

In most cases, a handwritten Promissory Note signed by both parties will stand up in court. However, using our form is simple and it can incorporate interest and build an amortization table. Plus, our document builder incorporates legal language into the document automatically.

What is fair interest rate to charge a friend or family member?

Some people are uncomfortable charging their friends or family members interest for loans, but you may consider at least charging a bit since that money will not be able to work for you in other ways until it is paid back. You can charge whatever interest rate you want, but in general, most choose to charge a bit less than what a bank might charge for a personal loan. Many choose to charge between five and ten percent interest. Many states have usury laws that limit how much you can charge for interest. Even if it is a personal, private loan it is prudent to stay under the usury limit in case you end up in court for nonpayment in the future.

Should I ask for collateral to secure a personal loan?

Collateral can sometimes help motivate the person you loan money to, to pay you back. Other times, they may think they don’t have to pay you back since you can take their collateral. Before accepting collateral in the terms of the loan, you’ll want to evaluate the value of the collateral and maybe even make arrangements to take possession of the collateral until the loan is paid in full. Common items used for collateral include real estate, cars, boats and recreational vehicles.

Should I loan money to friends or family?

Most financial advisors would say no. However, each situation is unique. You can never actually know for sure if someone will pay you back. They may lose their job, become ill, or simply choose not to pay you back. Many family disputes have arisen and friendships dissolved over money issues. A few recommendations include to never loan money you cannot afford to lose, to loan money already accepting you may never be paid back, and if you choose to lend money, get it in writing (always, even if it is your own mother).

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