What is a Promissory Note?
As the name implies, a Promissory Note is a written promise to pay someone to whom you owe money. It may also be referred to as an IOU or a loan agreement. Although it may seem like an informal document – particularly if you sign a promissory note when borrowing money from a friend or family member – promissory notes are legally enforceable.
Why do you need to use a Promissory Note?
A promissory note is typically a way of formalizing a basic repayment agreement between two parties. A promissory note establishes the terms, dates, and amount of each payment due. Without one you may not be paid on time or you may run into other issues.
When do you need to use a Promissory Note?
A promissory note should be created if you want to create a legally enforceable agreement that spells out the terms of the repayment. It also serves as an official record of the promise of repayment. A promissory note can be used for personal lending, real estate, business-related matters, and more. A promissory note should be used in the following situations:
- You plan to borrow money and want to secure the loan by putting up collateral.
- You plan to loan money and need a schedule of payments, or intend to charge interest.
- If you plan to borrow money between friends or family and want to show your intent to repay.
- If you loan money to a party and want the agreement in writing.
What are the main things that go on this form?
There are some important things that should be included in a promissory note:
- Clearly identify the parties (list the lender and borrower). The borrower can be an individual or corporation.
- Payment plan; establish a schedule to include how the borrowed amount is to be repaid, how to pay, and payment frequency (weekly, monthly, annually).
- The amount; the loan is typically straightforward, but if you decide to include interest and how it is to be compounded.
- Collateral; collateral secures repayment on a note. Collateral is when something is pledged to the lender to guarantee repayment – for example, a house is collateral on a mortgage.
- The consequences of late payment(s); specify if they will be charged and if so, the penalty/amount.
- Specify if the lender has permission to sell/transfer the loan.
- Amendments; an amendment, just like with many contracts or agreements, can only be enforceable if both parties agree to alter the terms of the note.
- Signatures; once the note has been constructed, both parties need to sign the agreement, officially binding the terms of the contract.
What are the most common mistakes to avoid?
A promissory note should be in a written format, not verbal. A promissory note is only valid when it deals specifically with the exchange of money. If you plan to include interest, it must be included. It should also include the date the loan will be “mature,” or satisfied.
Another thing to remember is the promissory note is not valid if it does not include both the signature of the borrower and the lender, so it is important to get it signed.
Do I need to use a lawyer, accountant, or notary to help me?
You can easily create a promissory note without hiring any lawyer, accountant, or notary. Creating the form online can save you time and money. It can also cut out the hefty expense of hiring a lawyer.
Why use our Promissory Note generator?
Our easy to use promissory note generator was creating by a staff of lawyers and business experts, and you can have a one for a fraction of the cost you would pay an attorney. Our tool has a subscription plan so you can create unlimited promissory notes at a low cost.
