How to write a promissory note for a personal loan – Before learning about this process, it is important to first know what a promissory note is and how it works. That is the primary purpose of this comprehensive guide. When it comes to personal loans between two individuals or parties, formality and clarity can avert disputes and make sure that both involved parties are protected.
This essential document, known as a promissory note, formalizes the loan agreement, specifying terms and conditions between borrower and lender. So, whether you are borrowing money from a family member or friend, creating a comprehensive and detailed promissory note is important to formalize the agreement and protect your interests.
What is a Promissory Note?
A promissory note is an official written document where the borrower (one party) agrees to pay a particular or fixed amount of money to the lender (other involved party) upon terms that are agreed upon by both of them.
Furthermore, this document functions as a written promise by the borrower to pay back the loan and adds details of the loan, such as the repayment schedule, amount, and many others. Besides, a promissory note is a legal contract that can be presented in court if the borrower does not pay back the loan, unlike other IOUs.
Types of Promissory Notes
There are different types of promissory notes, and the type you need depends on the lending situation.
- Demand promissory notes—repayable on demand.
- Secured promissory notes are backed by collateral.
- Installment payment promissory notes: Scheduled installment repayment.
- Unsecured promissory notes—collateral is not required.
What Does a Promissory Note Include?
A typical promissory note had these details:
- Loan amount.
- Name and contact details of the involved parties.
- Governing law.
- Interest rates.
- Repayment terms.
- Signature of the lender and borrower.
- Default consequences.
Why Should I Use a Promissory Note?
This legally binding document acts as a promise to the lender from the borrower to pay up the loan in full by or before the due date, depending on the repayment plan. Late payment fees, increased interest, and unpaid principal amounts can be included as well.
Apart from this, a promissory note protects the rights of the involved parties and can be referred back to if there are any disagreements. In conclusion, this document provides clarity and legal protection for both the lender and the borrower.
When to Use a Promissory Note
To have a legally binding document or record of a loan’s responsibilities and terms when borrowing or lending money informally, using a promissory note is advised. Hence, this will formalize and authorize the agreement between both parties.
How to Write a Promissory Note for a Personal Loan
Writing a promissory note might seem complicated, especially if you are new to this. However, when lending or borrowing money, a promissory note is an important document that states the loan agreement terms legally. Nevertheless, if you are experiencing difficulties, here is a step-by-step guide you can follow:
- Label the document as a promissory note.
- Indicate the date this document was created.
- State the full names and addresses of the lender and borrower.
- State the total amount of money borrowed.
- Specify the terms, repayment schedules, and interest rate.
- State the final date the loan would and should be paid in full.
- If applicable, add collateral information.
- Define late payment penalties.
- Both parties involved will sign the promissory note and date of signing as well.
Although it is not usually necessary, you can have the document notarized or backed by a witness for stronger support.
How to Make Changes to a Promissory Note
To make official changes to a promissory note, the lender and borrower need to agree to the changes or adjustments and document these changes in a written amendment or addendum formally. Then, both involved parties will sign and date the updated documents after the revised terms are stated and agreed on.
Frequently Asked Questions (FAQs)
Can a promissory note be used in court?
Yes, a promissory note can be presented in court because it is an obligatory document that can be used to enforce loan terms if required in court.
Is a promissory note the same as a contract?
Although a promissory note is a form of contract for a loan agreement, it pays more attention to the promise of the borrower to pay back the loan. Contracts, on the other hand, focus on a wider range of agreements.
Can a promissory note be changed after it is signed?
If you have signed a promissory note and you need to make changes again, it is possible to make adjustments. However, they need to be agreed upon by the involved parties and documented in the original note in a written amendment.
Do I need a lawyer to draft a promissory note?
Even though you can draft a promissory note by yourself, reaching out to a lawyer can make sure that this document meets the legal standards and safeguards your interests.
What happens if the borrower defaults on the promissory note?
Defaulting on payments allows lenders to amend the promissory note, claim collateral, initiate legal proceedings, or report delinquency to credit bureaus.