Promissory Notes

Definitions, samples, guidance and more on the complex topic of promissory notes.

A Grand Guide

Whether you’re a lender or borrower, a written promise keeps your loan agreement in check. But a sticky note won’t do—you’ll need to make something stronger than just an “IOU”. 💪

Enter: Promissory Notes

At its core, a promissory note (or a signed loan agreement) is a legally binding promise to pay a debt.

Using one can go a long way in making sure you’re paid in full and on time. Here’s everything you need to know about promissory notes, including where to get them and examples of when you might need to use them.

What we’ll cover:

What Is A Promissory Note?

Promissory notes are written loan agreements between a lender and borrower. 📃 People can use these legal documents for everything from real estate mortgages to personal loans between friends. They specify how much of the loan the borrower promises to pay back and the date you’ll pay it by. As long as a promissory note includes all key elements and is signed by both parties, it’s an official legal instrument 👩🏾‍⚖️. 

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9 Key Elements All Promissory Notes Should Include

While there are different types of promissory notes, all valid ones should include the following 10 elements, aka material terms:

Names and Contact Information

You’ll want the names and contact info of both parties (the lender and loan recipient).

Total Loan Amount

What’s the full amount of money, aka principal amount, the borrower owes you? Specify the currency, like USD.

Interest Rate On The Loan

Yes, even a personal loan between friends and family should include an interest rate. This makes it official and ensures you can write off any unpaid debt on your taxes in the event of nonpayment.

Collateral

Include any collateral given for the loan, if applicable (you will lay this out in a section called security agreement).

Signatures

A promissory note is only legally binding when signed by both parties. Otherwise, it’s just a piece of paper! ✒️

Payment Frequency, Amount & Time Frame

How will the borrower pay you? 💸 Write how often you want to be paid (monthly payments, quarterly, etc.), when the first payment will be, how much each payment should be, due dates, and the number of required principal & interest payments.

Extra Fees

This refers to any additional fees, charges, and conditions.

Date and Location

Write the date of promissory note creation and the location where it was created.

Transferable

Whether or not the loan agreement is transferable. A transferable promissory note means the lender can sell the promissory note as a security and allow a third party to collect the funds.

Examples

A few real world examples on the usage of promissory notes & why they come in handy.

A promissory note is a document that you can use in a variety of situations. Loan agreements work for car loans, student loans, and institutional business loans. Here are a few examples of when you might use this type of loan agreement—and why it’s a good idea:

A business loan from a family member

Luciana wants to turn her side hustle into a fully fledged business, but she needs a little bit of capital to get her going. She runs an in-home grooming business and wants to buy a truck that she can transform into a mobile pet spa 🐩. 

Luciana’s aunt agrees to fund part of her venture with a $5,000 personal loan. Both parties sign a promissory note to confirm that Luciana will pay her aunt back in five installments over the course of 18 months.

Small Business

Or a mortgage from a bank, with a co-signer

Jake and Dom want to buy a house. To do so, they need to get a mortgage. The bank they get the mortgage from gives them a promissory note to sign. 

This loan agreement complements a legally binding mortgage note contract, and confirms the principal, interest, and timeline of payment. Jake and Dom sign to agree that they’ll repay the loan by the mortgage maturity date.

Bank

A loan to a friend in a bind

Emma and Kate are friends. They both know that borrowing money from friends can get messy 🥴. That’s why they want to use a written loan agreement while Emma lends $1,000 to Kate. 

A promissory note takes away those awkward interactions. Emma doesn’t have to ask Kate how her new job is going and whether she has the money yet. Kate is good at sticking to deadlines, so it’s a win-win. The agreement does the leg work—and Emma and Kate can focus on being pals.

Female Friends

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Where To Get A Promissory Note

There are sample promissory notes all over the web. Make sure your loan agreement is valid by using an official document. Read the information below, then make your own promissory note. Download our loan agreement and promissory note template for free.

Promissory Note Template

                                                                                                                                                                                            Last Revised: March 2022

 

The Loan Agreement (the Agreement) is made on START DATE, between LENDER NAME (the Lender), at the address of LENDER ADDRESS, and BORROWER NAME  (the Borrower), at the address of BORROWER ADDRESS. At times in this Agreement the Borrower and Lender maybe individually referred to as a “party” or jointly as the “parties”.

Loan Commitment

The Lender agrees to lend the Borrower the principal sum of $ PRINCIPAL United States Dollars, hereinafter referred to as “the Principal”, pursuant and subject to the terms of the Agreement. And the Borrower agrees to repay the Principal in addition to an annual interest rate of INTEREST RATE % computed on a monthly basis, and to be repaid in full on or before MONTHS Gregorian calendar month(s) as of the date first written above hereinafter referred to as the “Due Date”.

Payments, Repayments and Prepayments

The Loan, defined for the purposes of this Agreement as the Principal plus the agreed upon interest rate, will be due and payable in full on the Due Date. The full balance of the Loan will be paid off in regular installments scheduled on a monthly basis, as agreed upon by both parties. The first repayment installment will be due one month following the successful transfer of the Principal from the Lender to the Borrower. Additionally, no Interest may be accrued on the Principal before the repayment schedule is initiated.

The Borrower may, at its option, pay off the full balance of the Loan, may be paid off in full before the Due Date, without penalty. Similarly, the Borrower may, at its option, repay sums of money before they specifically demanded, including but not limited to paying more than the expected amount of money due on monthly installments.

Additionally, money that is not paid on-time by the Borrower, will continue to accrue the Interest Rate outlined in this Agreement. Late payments will otherwise not be subject to penalties.

Payments made by either party can be made in any format, including but not limited to bank transfers, cash deposits, and through other online payment platforms.

All payments of principal and interest on this Loan shall be paid in the legal currency of the United States.

Security

The Loan shall be unsecured. Borrower does not grant Lender a security interest in any property or asset.

Loan Extension

If the Borrower has outstanding financial obligations to the Lender and would like to extend the loan, they may do so up to one month preceding the Due Date. The loan may be extended for a minimum time period of a month, and for a maximum time period of twelve (12) months, and must be agreed upon by both parties. Throughout the extension period, the Borrower must pay off the remaining balance of the loan outlined in this Agreement, and an additional interest annual rate of 3% computed monthly, on the outstanding loan balance will be payable to the Lender.

No Guarantors

Under this Agreement, there shall be no persons or entities responsible for the repayment of the Loan other than the Borrower. The Borrower acknowledges and agrees that it has no guarantors for this Loan.

Events of Default

If any of the following events of default occur, this Loan and any other obligations of the Borrower to the Lender, shall become due immediately, without demand or notice:

  1. the failure of the Borrower to pay the principal and any accrued interest as detailed when due;
  2. the liquidation or dissolution of the Borrower, or the death or incompetency of the Borrower;
  3. the filing of bankruptcy proceedings involving the Borrower as a debtor;
  4. the application for the appointment of a receiver for the Borrower;
  5. the making of a general assignment for the benefit of the Borrower's creditors;
  6. the insolvency of the Borrower;

If the Borrower defaults under this Agreement and fails to repay the Loan in full by the Due Date, the unpaid principal shall accrue interest at the maximum rate allowed by law, until the Borrower is no longer in default.

If the Borrower defaults under this Agreement and does not remedy the default within the minimum allotted time period as prescribed by the governing laws following a written notice of default, the Lender reserves the right to declare outstanding sums payable and due immediately.

Attorney’s Fees and Costs

The Borrower agrees to pay the following costs, expenses, and attorney fees paid or incurred by Lender, or adjudged by a court: (a) reasonable costs of collection and costs, expenses, and attorney fees paid or incurred in connection with the collection or enforcement of this Loan, whether or not suit is filed; (b) reasonable costs, expenses, and attorney fees paid or incurred in connection with representing Lender in any bankruptcy, reorganization, receivership, or other proceedings affecting creditors’ rights and involving a claim under this Loan; and (c) costs of suit and such sum as the court may adjudge as attorney fees in any action to enforce payment of this Agreement or any part of it.

Indemnity

The Lender shall be not held liable for any injuries, loss, damages, or costs which may incur from Borrower’s or third-party actions in connection with funds related to the Loan. Borrower agrees to indemnify Lender from any legal expenses that may result from lawsuits or proceedings related to such actions.

Notices

All notices required or permitted under this Agreement shall be in writing and delivered by electronic mail or certified US mail in a timely manner.

Waiver of Presentment

Borrower, endorsers, and all other persons liable or to become liable on this Loan waive presentment, protest, and demand; notice of protest, demand, and dishonor; and all other notices or matters of a like nature.

Non-Implied Waiver

Any failure or delay by the Lender in exercising or enforcing the Lender’s rights under this Agreement shall not be considered a waiver of such rights. Furthermore, there shall be no implied waiver of the Lender’s rights if the Lender waives any obligation of the Borrower in connection with this Agreement. For avoidance of doubt, a delay failure to accelerate the debt evidenced hereby by reason of default in the payment of a monthly installment or the acceptance of a past-due installment shall not be construed as a waiver of the right of Lender to thereafter insist upon strict compliance with the terms of this Agreement without notice being given to Borrower. All rights of the Lender under this Agreement are cumulative and may be exercised concurrently or consecutively at the Lender's option.

Assignment

Neither party shall have the right to assign or subcontract any part of its obligations under this Agreement.

Amendments

This Agreement may only be amended by a writing executed by both the Borrower and the Lender.

Arms-Length Agreement

This Agreement was entered into at arm's length, without duress or coercion, and is to be interpreted as an agreement between parties of equal bargaining strength. Both the Borrower and the Lender agree that this Agreement is clear and unambiguous as to its terms, and that no parole or other evidence will be used or admitted to alter or explain the terms of this Agreement, but that it will be interpreted based on the language within its four corners in accordance with the purposes for which it is entered into.

Execution in Counterparts

This Agreement may be executed in multiple counterparts, which shall be deemed an original but all of which together shall constitute one and the same instrument. Signatures exchanged electronically shall be valid and effective as original signatures.

Severability

If any provision of this Agreement is held void, invalid, or unenforceable by a court of competent jurisdiction, the remainder of this Agreement, and the application of such provision to other parties or circumstances, shall not be affected thereby, the provisions of this Agreement being severable in any such instance.

Final Agreement

This Agreement supersedes all prior understanding, written or oral, between the parties.

Governing Law

This Agreement shall be governed under the laws and jurisdiction of LENDER STATE.

IN WITNESS WHEREOF, this Agreement has been executed and delivered in the manner prescribed by law as of the date first written above.

 

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Can you amend a promissory note?

Signing a loan agreement makes it official, but it’s not always the final step. In some cases, loan agreements need to be amended. How can you change the terms of your note?

Here are a few things to know when amending a promissory note:

  • You can create a legally binding addition to your loan agreement by amending the documenting and reinstating the new version.
  • Even if you change the terms of the agreement, you still need to keep the original document for reference.
  • People amend loan agreements for all kinds of reasons. Some of the reasons to amend include adding late fees, waiving prepayment fees, changing the interest or loan principal, adding a severability clause, and more.
  • In order for the amendments to become effective, both the borrower and lender must agree to the terms. 🤝🏼
  • The amended document must be signed by both parties again. Don’t rely on signatures from the original document—that won’t fly in court!
  • It’s best to create an amended loan agreement using the template or service you used for the original note. For example, if you used Pigeon Loans for your original promissory note, use Pigeon Loans again to amend it. This helps make sure you don’t accidentally void the document by using incorrect language or unfair terms (more on that below!).

PRO TIP: If you don’t follow these steps when amending a promissory note, your agreement may become invalid—so be sure to follow them to a T. 💯 

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What Can Void A Promissory Note?

Promissory notes aren’t complicated, but there are some inconsistencies that can void your loan agreement. Make sure your promissory note avoids the following:

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To Notarize or Not?

Promissory notes usually do not require signatures from notary publics in order to be legally binding. However, notarizing your document can make it more official in certain circumstances.

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FAQ About Promissory Notes

Answers to your most commonly asked questions about promissory notes.

What’s the difference between a secured and unsecured promissory note?

A secured promissory note requires the borrower to put up collateral 🏠. This adds an extra layer of protection for the lender as they await loan repayment. Collateral may be in the form of a hard asset (aka physical asset) like a home, rental property, or vehicle.

An unsecured loan agreement does not require collateral, but it’s still legally binding.

Is a promissory note a security?

Only companies issuing promissory notes can have promissory notes as securities (this doesn’t apply to individuals). The U.S. Securities and Exchange Commission (SEC) says promissory notes are securities if they have a maturity of at least nine months (meaning the notes themselves are 9+ months old). 

To be considered a security, a promissory note must not be secured by collateral like a mortgage, lien on a home, small business, or business asset. It also can’t be a character loan, consumer finance loan, or commercial loan.

What’s the difference between a simple and demand promissory note?

Lenders use a simple promissory note for lump sum payments. This is especially helpful for personal loans between friends and family that require a single payment.

Demand promissory notes are less common. They allow the lender to request money to be due on demand. These types of written loan agreements typically require notice ahead of time.

Custom promissory notes may have unique terms that don’t fall under either of these categories.

What is a master promissory note?

A master promissory note (MPN) is a loan agreement that covers a group of loans. MPNs almost always refer to federal student loans being paid to the U.S. Department of Education. Borrowers who receive federal student loans often receive multiple loans to help pay for the cost of school. Using an MPN means borrowers don’t have to sign a new loan agreement each school year 🎓.

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Are promissory notes legit?

Most promissory notes are legitimate, but promissory note fraud is alive and well. This is usually in the case of a company’s promissory note security that is transferable for third parties to purchase. According to the SEC, “Fraudsters across the nation have recently begun to use promissory notes as vehicles to defraud investors out of hundreds of millions of dollars.” 

The SEC says to avoid insured, guaranteed, or risk-free promissory notes. Check legitimacy through federal or state securities regulators.

What is not considered a promissory note?

A promissory note is NOT a verbal agreement 🙊. These loan agreements must be written. However, it’s simple to create one once you know what elements you must include. A promissory note may accompany a contract or, in the case of a personal loan between friends and family, act in lieu of a contract.

Bottom Line

Promissory notes lay out the total loan amount, payment date and method, and other loan agreement details. At its core, it’s simple—but make sure you get it right. Use clear clauses, keep track of any changes, and always make sure to get it signed. With that, you're locked, loaded, and ready to lend 🔏.

If you’re considering lending money to a friend or accepting a personal loan, Pigeon Loans has the resources you need. Sign up for an account and create your own promissory note to get started.