Table of Contents

What Is a Promissory Note?

A promissory note is a written agreement where one party promises to repay a loan amount. This promise-to-pay agreement outlines agreed-upon terms, including repayment schedules, interest rates, and penalties. Both parties review and sign it to accept their obligations. Putting the loan terms in writing can help reduce misunderstandings and disputes.

If a promissory note is negotiable, the lender can sell the loan to someone else. Some notes are non-negotiable, meaning the repayment must stay with the original lender and borrower. Decide upfront if you want the note to be transferable and ensure the loan terms allow it.

Promissory notes are ideal for personal loans between people who know each other well. They can also be used for business funding and real estate deals. Use Legal Templates’ promissory note template to create your own in minutes. It provides a clear framework when lending money.

When Should You Use a Promissory Note?

Promissory notes help document loans in various situations. They provide legal protection and peace of mind for both parties. Common uses include:

Formalizing personal loans: Create clear repayment terms when lending money to friends or family.
Securing real estate financing: Document private loans or contributions toward a property purchase.
Funding business growth: Establish repayment plans for startups or equipment purchases.
Purchasing vehicles or equipment: Ensure clear expectations when financing cars or machinery.
Covering educational expenses: Set repayment terms for tuition or other training-related costs.
Managing medical expenses: Provide financial support for treatments with a structured contract.

Promissory notes are particularly useful when trust exists between the lender and borrower. However, formal documentation helps protect both parties.

Promissory Notes: By State

Promissory notes must follow different rules depending on your state. Our state-specific guides provide tailored information on local laws. You can learn about interest rate limits and how long you have to collect on a debt. Confidently complete your state-compliant promissory note using our guided form.

Promissory Notes: By Type

Secured promissory notes use collateral to reduce risk, while unsecured notes are backed by the borrower’s promise to repay. Use the table below to compare these options and choose the right type for your needs.

Feature	Secured Promissory Note	Unsecured Promissory Note
Collateral	Backed by an asset	No collateral required
Risk for lender	Lower risk due to presence of collateral	Higher risk due to lack of collateral
Interest rates	Tend to be lower	Tend to be higher
Common uses	Real estate and business transactions	Smaller personal loans

Secured

A document used to include collateral in a high-stakes loan.

Unsecured

A document used for quick loans with trustworthy borrowers.

How to Write a Promissory Note

Creating a promissory note is straightforward when you know the key elements to include. Follow these steps to ensure your document is legally enforceable and tailored to your needs.

1. Identify the Parties

List the borrower (the person or entity receiving the loan) and the lender (the provider of the loan). If either party is a business, include the business name and ensure an authorized representative signs the note.

If the lender has concerns about the borrower’s financial stability, they can request a cosigner. The cosigner agrees to be responsible for the loan if the borrower defaults.

To assess the borrower’s financial reliability, you can request their credit report. Borrowers can access free annual credit reports through websites like AnnualCreditReport.com. If you perform a credit check on a borrower, you must follow the Fair Credit Reporting Act (FCRA). This act requires a permissible purpose and written consent.

2. Define the Loan Terms

Outline the loan’s details to ensure everyone understands the agreement. Include the following:

Loan amount: Specify the exact amount the borrower will receive.
Debt acknowledgment: Include a statement from the borrower recognizing their obligation to repay.
Repayment schedule: Define how the borrower will pay. They may pay in a lump sum, in installments, or on demand.
Interest rate: State the percentage rate and confirm it complies with state usury laws.
Collateral: List any assets that will secure the loan.
Due date: Include the final date by which the borrower must repay the loan.
Late payment penalties: Explain the fees for delayed payments.
Default terms: Record the lender’s rights if the borrower cannot meet their obligations. For example, the lender may require immediate repayment.
Prepayment terms: Indicate whether the borrower can repay the loan early. Specify any conditions or penalties for doing so.

Use simple and specific language to avoid misunderstandings and ensure the terms are enforceable.

3. Include Additional Terms

These optional clauses can make your borrow-and-repay contract more comprehensive:

Amendments: Define how the parties can make changes to the contract.
Governing law: State which jurisdiction’s laws will apply to the note.
Prepayment: Specify whether the borrower can repay the loan early without penalties.
Joint and several liability: State that multiple borrowers will share equal responsibility for repayment (if applicable).
Right to transfer: Indicate whether the lender can transfer the note to another party.

4. Sign and Distribute the Note

All parties, including any cosigners, should sign the promissory note. Their signatures indicate their agreement to its terms. Notarization isn’t required, but it’s a good idea for larger or more complex loans.

Keep the original note in a lockbox or another safe place. Ensure both parties have copies of the signed note for their records. Store a digital copy in a secure location for easy access.

5. Enforce the Agreement (If Necessary)

If the borrower defaults on the agreement to repay the debt, you can take steps to enforce the promissory note. Start by issuing a demand for payment letter to request payment by a specific date. If the borrower ignores this letter, you can pursue other options, such as:

filing a case in small claims court
filing a lawsuit in a higher court (if the loan amount exceeds small claims limits)
recovering collateral (if the note is secured)

A promissory note may be unenforceable if any of these statements are true:

The note doesn’t include essential details like the loan amount or repayment terms.
One or both parties signed under duress or coercion.
The transaction involves illegal activities such as loan sharking.
One party forged or altered the note fraudulently.

6. Release the Borrower

Upon full repayment from the borrower, the lender can release them using a promissory note release. This form acknowledges that the borrower has fulfilled the loan terms. It serves as proof that the debt has been repaid, giving clarity and closure to both parties.

Promissory Note Sample

You can see what a promissory note looks like below by viewing our sample. Create your own using our template and download the final version in PDF or Word format.

promissory-note

Usury Limits by State

Usury laws limit the interest rates lenders can charge. These limits protect borrowers from excessively high costs and promote fair lending practices. They vary by state and depend on the loan type and terms. Charging more than the legal rate can lead to penalties or make the loan unenforceable. Below is a summary of maximum interest rates for private loans by state.

* This table only includes maximum interests rates (usury limits) applicable to private loans.

State	Maximum Annual Rate	Additional Notes	Law
Alabama	6%; 8% if agreed upon in writing	Excluding loans over $2,000	AL Code § 8-8-1
Alaska	Federal funds rate + 5%; 10.5% if no contract	Excluding loans over $25,000	AK Stat § 45.45.010
Arizona	10%; no limit if agreed and contracted upon		AZ Rev Stat § 44-1201
Arkansas	Federal discount rate + 5% (capped at 17%)	Capped at 17%	AK Const. Art. XIX § 13
California	7%; 12% if agreed upon		CA Const. Article XV § 1 and CA Civ Code § 1916.1
Colorado	8%; 45% if agreed and contracted upon		CO Rev Stat § 5-12-101 and CO Rev Stat § 5-12-103
Connecticut	12%		CT Gen Stat § 37-4
Delaware	Federal discount rate + 5%		DE Code tit. 6, § 2301
District of Columbia	6%; 24% if by contract in writing		DC Code § 28-3301 and DC Code § 28-3302
Florida	Average of the Federal discount rate for the preceding year + 5%		FL Stat § 687.01 and FL Stat § 687.03
Georgia	7%; 16% if contracted in writing and loan is less than $3,000	No limit if loan is between $3,000 and $250,000	GA Code § 7-4-2 and GA Code § 7-4-18
Hawaii	10%		HI Rev Stat § 478-2
Idaho	12% unless agreed and contracted upon		ID Code § 28-22-104
Illinois	9%		815 ILCS 205/4
Indiana	25%		IN Code § 24-4.5-3-201
Iowa	5%; capped at the official usury rate if agreed upon in writing		IA Code § 535.2(3)(a)
Kansas	10%; 15% if agreed upon		KS Stat § 16-201 and KS Stat § 16-207
Kentucky	8%; 19% OR Federal discount rate + 4% (whichever is lower) if agreed upon	No limit if loan is > $15,000	KY Rev Stat § 360.010
Louisiana	12%		LA Stat tit. 9 § 3500
Maine	6%; no limit if agreed upon		ME Stat tit. 9-B § 432
Maryland	6%; 8% if agreed upon in writing		MD Code Com. § 12-102 and MD Code Com. § 12-103
Massachusetts	6%; 20% if agreed upon		MA Gen Law Ch. 107, § 3
Michigan	5%; 7% if agreed upon in writing		MI Comp Laws § 438.31
Minnesota	6%; 8% if agreed upon in writing	No limit if loan is > $100,000	MN Stat § 334.01
Mississippi	8%; 10% OR Federal discount rate + 5% (whichever is greater) if agreed upon		MS Code Ann § 75-17-1
Missouri	9%; 10% OR market rate (whichever is greater) if agreed upon	Only applies to first mortgages made by lenders that are not insured bank, savings and loan, or credit union, or any who have made $1 million in real estate loans in the past year.	MO Rev Stat § 408.030
Montana	6% + federal funds rate; 15% if agreed upon in writing		MT Code § 31-1-107
Nebraska	6%; 16% if agreed upon in writing		NE Rev Stat § 45-101.03
Nevada	Prime rate of NV's largest bank + 2%; no limit if agreed upon		NV Rev Stat § 99.040
New Hampshire	10%; no limit if agreed upon		NH Rev Stat § 336:1
New Jersey	6%; 16% if agreed upon in writing	- No limit if loan > $50,000 - Interest rates exceeding 30% for loans to individuals (50% for businesses) are considered criminal usury	NJ Stat § 31:1-1
New Mexico	15%; no limit if agreed upon		NM Stat § 56-8-3
New York	16%	Interest rate exceeding 25% for loans are considered criminal usury	NY Gen Oblig § 5-501
North Carolina	8%; no limit if agreed upon OR if the loan is greater than $25,000		NC Gen Stat § 24-1.1
North Dakota	6%; average interest on treasury bills + 5.5% if agreed upon in writing	[average interest on treasury bills + 5.5%] must be greater than 7%	ND Cent Code § 47-14-09
Ohio	8%	No limit if loan > $100,000	OH Rev Code § 1343.01
Oklahoma	6%; no limit if agreed upon		OK Stat tit. 15, § 266
Oregon	9%; no limit if agreed upon		ORS § 82.010
Pennsylvania	6%	No limit if business loan > $10,000 or unsecured notes with loan > $35,000	41 PA Stat § 201
Rhode Island	12%; 21% if agreed upon		RI Gen Law § 6-26-2
South Carolina	12%		SC Code § 37-3-201
South Dakota	12%; no limit if agreed upon		SD Codified Laws § 54-3-1.1 and SD Codified Laws § 54-3-4
Tennessee	10%	Usury rates do not apply for loans under $1,000	TN Code § 47-14-103
Texas	6%; 10% if agreed upon		TX Fin Code § 302.001(b)
Utah	10%; no limit if agreed upon		UT Code § 15-1-1
Vermont	12%		VT Stat tit. 9, § 41a
Virginia	6%; 12% if agreed and contracted upon		VA Code § 6.2-301
Washington	12% OR average interest on treasury bills + 4%, whichever is greater		WA Rev Code § 19.52.020
West Virginia	6%; 8% if agreed and contracted upon		WV Code § 47-6-5
Wisconsin	5%; no limit if agreed upon		WI Stat § 138.04
Wyoming	7%; no limit if agreed upon		WY Stat § 40-14-106

What Promissory Notes Are Not

While promissory notes are valuable tools for documenting loan agreements, they have limitations. Here’s what they don’t do:

They aren’t full loan agreements: Promissory notes focus solely on repayment terms. Loan agreements cover broader details like the loan’s purpose.
They don’t guarantee repayment: A promissory note creates a legal obligation, but repayment still depends on the borrower’s willingness to pay.
They aren’t informal IOUs: Unlike IOUs, promissory notes are formal, legally binding documents with specific terms.
They aren’t for services or goods: Promissory notes are for monetary loans, not bartering or service agreements.

Free Promissory Note Template