Promissory Note for Personal Loan Explained

Understanding promissory notes is vital if you plan to lend or borrow money. They detail important personal loan terms, including repayment schedules, interest rates, and default consequences. The goal of a promissory note is to prevent legal disputes and protect the lender and the borrower.

Whether you’re lending or seeking financing, this guide will help you grasp the essentials of promissory notes for personal loans.

What are promissory notes for personal loans?

A promissory note for a personal loan is a legal agreement a lender and a borrower sign. It outlines the loan’s terms and the borrower’s promise to repay the debt. It specifies the loan amount, interest rate, repayment schedule, and any other conditions both parties agree to. 

A promissory note is often required if you get formal financing from a bank, credit union, or online lender, but it may not be required for informal loans between family and friends. Even so, it’s always wise to require or request one; it can help prevent misunderstandings or disputes.

Promissory notes offer a level of protection and clarity for the lender and the borrower:

• Lender protections: For the lender, a promissory note provides legal documentation of the loan’s terms and the borrower’s agreement to repay, which can be crucial in case of disputes or default. 
• Borrower protections: For the borrower, a promissory note details the obligations and expectations, preventing surprises regarding repayment terms or additional fees.

The clarity a promissory note can provide is crucial for establishing and maintaining a positive relationship between the borrower and the lender. It’s important when significant amounts are loaned, or financial misunderstandings could jeopardize personal relationships.

Using a promissory note helps both parties understand and acknowledge the seriousness of the transaction and the commitment of both parties to uphold their end of the agreement. 

It’s a way to establish trust and respect between the borrower and the lender. In so doing, it helps ensure that financial dealings do not strain personal or business connections.

Example of a promissory note for a personal loan

Promissory notes vary depending on the loan’s size. Expect a more detailed note for larger personal loans because more is at risk. This detailed loan documentation ensures that both parties are clear on the agreement’s terms, protecting their interests should anything go wrong.

Many legal websites offer customizable promissory note templates if you’re considering lending or private borrowing. Because promissory notes are legally binding documents, accuracy is of the utmost importance. 

Here’s an example:

For those looking to draft a promissory note, especially for large amounts, we recommend seeking legal counsel or opting for a template vetted by legal professionals to ensure all bases are covered.

No matter how the promissory note looks, here are several standard details to include:

• Principal loan amount and interest rate
• Repayment schedule and terms
• Collateral (if any)
• Fees and penalties (e.g., late fees, prepayment penalties)
• Consequences of default
• Governing law and dispute resolution

As you review a promissory note, look for each of these details. If you’re the borrower and you can’t find where this information is covered, ask your lender to point out where you can find it. It’s essential to ensure you understand the loan requirements to avoid surprises. 

How to write a promissory note for a personal loan

Creating a promissory note for a personal loan, even between friends or family, is essential. It not only provides a written record of the loan but also outlines the terms and conditions the lender and the borrower agreed to. 

Sections you may want to include in a promissory note include the following:

1. Date and parties involved: Begin by stating the date the promissory note is being created. Clearly identify the lender and the borrower by including their full legal names and addresses. This establishes who is involved in the loan agreement.
2. Loan amount: Specify the amount of money being loaned. This amount, referred to as the principal, should be written in both numerical and word format to avoid any confusion.
3. Interest rate: If the loan carries an interest rate, detail this in the promissory note. Specify whether it’s a fixed or variable rate and how it will be calculated. If no interest is being charged, it’s best to state that the loan is interest-free.
4. Repayment terms: Outline how and when the loan will be repaid. This section should include the repayment schedule (e.g., monthly or quarterly), the amount of each payment, and the final payment due date. Clearly stating the start date of repayments is also crucial.
5. Payment method: Indicate the preferred method of payment, whether through bank transfer, cash, check, or other means. Including where payments should be sent can also be helpful.
6. Late fees and penalties: Specify any fees for late payments or penalties for missed payments. This section should outline the consequences of failing to make payments on time, including any additional charges or interest.
7. Default terms: Detail what constitutes a default on the loan and the steps to be taken if the borrower doesn’t meet the terms of the promissory note. This might include legal actions or the requirement to pay the remainder of the loan in full.
8. Collateral (if any): If the loan is secured with collateral, describe the collateral in detail. This section should explain the conditions under which the lender can take possession and ownership of the collateral.
9. Governing law: Include which state’s laws will govern the promissory note. This is essential if the lender and borrower are in different states.
10. Signatures: The lender and the borrower must sign and date the promissory note. Signatures formalize the agreement and indicate that both parties have read, understood, and agreed to the terms.

Writing a promissory note for a personal loan between friends or family members ensures clarity and protection for both parties. This legal document can help prevent misunderstandings and provide a clear pathway for repayment.

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Tip

A promissory note is a legal document. We recommend using a form prepared and reviewed by a legal professional. Rather than drafting the promissory note on your own, seeking legal advice might help you prevent future problems, particularly for large or complex loans.

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How to sign a promissory note

When signing a promissory note, it’s necessary to understand the legal implications, especially regarding electronic signatures (e-signatures) and notary requirements. Some lenders may require you to sign a physical document (often called a “wet” signature), while others may allow you to e-sign it.

Given the complex legal environment and the potential complications of using e-signatures for some formal legal documents, including promissory notes, seeking legal advice is wise. This ensures compliance with all relevant laws and regulations and is crucial for lenders.

This step will help safeguard the interests of the borrower and lender and ensure the promissory note’s enforceability. Read on for more details about e-signatures, notary requirements, and promissory note storage.

E-signatures

E-signatures have been legally recognized for over two decades for transactions where parties agree to conduct business electronically, as noted in the federal ESIGN Act and the UETA (Uniform Electronic Transactions Act).

However, not all documents and signatures fall under these laws, and specific considerations may apply to legal documents like promissory notes. 

Using e-signatures for promissory notes is feasible, but certain conditions must be met, especially if you plan to transfer these notes as collateral. For this reason, it’s essential to seek legal advice before proceeding. 

Notary requirements

The requirement for notarization varies depending on the legal jurisdiction and the nature of the promissory note. While not all promissory notes require notarization to be considered valid, notarizing a document can add a layer of legitimacy and protection. 

Requiring a notary can be helpful for large or complex loans. It’s best to consult with a legal professional to understand the specific requirements of your state or jurisdiction.

Original copy and storage

The lender usually retains the original copy of the promissory note. It signifies its right to repayment. Both parties should keep a copy of the note for their records, stored securely with other essential documents. 

The promissory note may need to be referenced in the event of a dispute, loan modification, or for tax and record-keeping purposes.

How to make changes to a promissory note

Making changes to a promissory note, whether before or after the loan is finalized, requires careful consideration and clear communication between the borrower and the lender. 

Here’s what to do if you need to make changes to a promissory note.

Before the loan is finalized

Before signing the loan documents, review the promissory note in detail. Ensure you understand every term, including the repayment schedule, interest rate, and any penalties.

If you disagree with anything specified in the promissory note, discuss these with the lender immediately. It’s much easier to make changes before both parties have signed the document.

Any agreed-upon changes should be made in writing. Either the promissory note should be fully revised, or both parties should initialize the amendments to acknowledge the modification before signing the final document.

After the loan is finalized

Making changes after both parties have signed the promissory note can be more complex. It typically requires an amendment to the agreement.

• Mutual agreement: Both the borrower and lender must agree to any changes. Open communication is critical. Express why the change is necessary and how it affects the agreement.
• Draft an amendment: Once both parties agree on the changes, draft an amendment to the original promissory note. This document should detail the changes made and reference the original agreement.
• Sign the amendment: Both parties must sign the amendment. For added legal protection, consider having the signatures notarized. This helps verify the authenticity of the amendment if disputes arise later.
• Attach the amendment: Keep the amendment with the original promissory note. Together, these documents constitute the complete, updated agreement between the borrower and lender.

Best practices

If you are uncertain about changing a promissory note, seeking legal advice is wise. A legal professional can ensure that the amendment process is handled correctly and that the updated agreement remains enforceable.

Both parties should keep detailed records of all communications and documents related to the amendment. This documentation can be vital in resolving any future disputes.

When negotiating changes, remember the relationship between the borrower and the lender. Strive for solutions that maintain or enhance mutual trust and respect.

Amending a promissory note requires agreement, clear documentation, and careful attention to details and legalities. Whether adjustments are needed before the loan is finalized or after, the process should be approached with thoroughness and transparency.