What a promissory note is and what it must say

A promissory note is a signed document in which one person, the borrower, promises to pay another, the lender, a stated amount of money. It names the amount, the interest, when payment is due and how it will be made. The note is the evidence of the debt. If the borrower stops paying, the note is what the lender produces to show what was owed and on what terms.

Notes are older than banks. The form has not changed much because it does one job well: it fixes the terms at the moment the money changes hands, so that neither side has to rely on memory later.

In most states a note that meets a short list of formal requirements is also a negotiable instrument under Article 3 of the Uniform Commercial Code. That means the lender can sell or assign it and the buyer can enforce it. For a loan between relatives this rarely matters, but it is why the standard wording is so plain.

An IOU acknowledges that a debt exists. It usually says nothing about when or how it will be repaid, whether interest is charged, or what happens if it is not repaid. Courts treat it as evidence of a debt, not as a contract to repay on terms.

A promissory note contains the promise and the terms. It can be enforced as written. The difference matters most in the situations people hope never to face: a dispute, a death, a divorce, or a tax examination. In each of those, the question is not whether money was handed over but what the agreement was. The note answers it.

Every note should state the following, in plain words. Each is a term the parties would otherwise argue about.

• The parties. The full legal names of the borrower and the lender, and their addresses. If a business is borrowing, its exact registered name and the state it is organized in.
• The principal. The amount lent, in figures and in words. The date it was or will be advanced.
• The interest. The annual rate, whether it is fixed, and how it is computed. A note for a private loan normally charges simple interest on the outstanding principal, so the borrower never pays interest on interest. See what rate to charge on a family loan for the tax floor.
• The repayment schedule. The amount and due date of each payment, and the maturity date on which the last of it is due. For a loan paid in installments, the structure: level payments that amortize the balance, interest-only payments with the principal due at the end, or a fixed amount of principal each period. The amortization schedule is usually attached.
• Prepayment. Whether the borrower may pay early, and whether any charge applies. Most private notes allow prepayment without penalty.
• Late payments. How many days of grace after a due date, the late fee if any, and when the loan is in default.
• Default and acceleration. What counts as default, and the lender’s right to declare the whole balance due after it. Without an acceleration clause the lender can only sue for each missed installment as it falls due.
• Security. Whether the loan is secured by property, and by what. The note alone does not create a lien; that takes a separate security agreement, mortgage or deed of trust. See promissory note vs loan agreement.
• Governing law. The state whose law applies. Usually where the lender lives or where the property is.
• Signatures. The borrower must sign. The lender’s signature is customary and avoids any later argument about whether the lender accepted the terms. The date of signing.

• Purpose. What the money is for. It has no legal effect on repayment but it helps everyone remember why the loan was made and, for a loan to a business, supports treating it as debt rather than an investment.
• Method of payment. Bank transfer, check, or an automatic debit. Naming it removes one source of friction.
• Notices. Where each party should send a notice, and that email counts.
• Assignment. Whether the lender may transfer the note. If the lender might want to sell it later, say so.
• Waiver of presentment. Standard wording in which the borrower gives up the formal demand steps that a holder would otherwise have to take before suing. It is in almost every printed form.
• Costs of collection. That the borrower pays reasonable attorney fees if the lender has to enforce the note. Enforceable in most states if stated.

A note does not need a witness or a notary to be valid in most states. A mortgage or deed of trust that secures it usually does, because it has to be recorded. Electronic signatures are valid for notes under federal and state law; see electronic signatures on promissory notes.

Keep the signed original, or the executed electronic copy with its signature record, for the life of the loan and for several years after it is paid. Keep a record of every payment alongside it. When the loan is paid, the lender should mark the note paid and return it, or give the borrower a signed release. A paid note that is never cancelled is an invitation to a dispute later.

If the terms change after signing, for example because the borrower needs a longer term, write an amendment that both parties sign and keep it with the note. A verbal change to a written note is hard to prove and may not be enforceable at all.

For a straightforward loan between individuals, a well-drafted form is enough. The promissory note template on this site shows the standard clauses and what each does. NoteHouse drafts the note from the terms you enter, attaches the schedule, and collects both signatures; see how it works.

Use a lawyer when the loan is large relative to what either party has, when it is secured by real estate or a business, when a business entity is borrowing, or when the loan is part of a larger arrangement such as a property sale or a divorce settlement. The note is cheap to get right and expensive to get wrong.