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Document your loan with a written promissory note that protects both lender and borrower. Select your state for the state-titled installment note with governing-law language.
A written promissory note provides legal protection for both lender and borrower by documenting the loan terms, repayment schedule, and consequences of default. It establishes a legally binding obligation to repay the debt, creates clear expectations, and provides evidence for tax purposes and legal enforcement if the borrower fails to repay.
A promissory note written with your state's governing-law language keeps the agreement anchored in the rules your courts will apply. A proper note protects the lender's right to collect the debt, including through the courts if necessary, while protecting the borrower by clearly defining the payment terms and what happens on default.
Professional loan documentation creates clear expectations and legal evidence, establishing the loan amount, interest rate, payment schedule, and default consequences. This prevents disputes about loan terms, provides tax documentation for both parties, and creates enforceable evidence for collection actions if needed.
A promissory note is a written, legally binding promise to repay a specific amount of money by a certain date or on demand. It's a formal loan agreement that documents the borrower's obligation to repay the lender, including the loan amount (principal), interest rate (if any), payment schedule, and consequences of default. Promissory notes are enforceable in court and create a legal debt obligation.
Use a promissory note any time you lend money and want legal protection. Common situations include: (1) Lending money to family or friends; (2) Small business loans; (3) Seller financing for real estate or vehicles; (4) Student loans; (5) Bridge loans or short-term financing. A promissory note formalizes the loan, prevents disputes about terms, provides tax documentation, and creates legal recourse if the borrower doesn't repay.
A well-drafted promissory note records: (1) the date of the note; (2) the principal amount; (3) the payment schedule and maturity date; (4) interest terms — or that the loan is interest-free; (5) what happens on default, including acceleration; (6) prepayment rights; (7) the borrower's name and signature; and (8) the lender's name and the place for payment. Some states require additional disclosures for certain loan types.
No, you can make an interest-free loan. If you do charge interest, state usury laws limit the rate, and the limits vary by state, loan type, and lender — check your state's current rules before you set a rate. For family loans over $10,000, IRS rules may treat forgone interest below the Applicable Federal Rate (AFR) as a taxable gift.
In most states, a promissory note is legally enforceable with just the borrower's signature – no witness or notary required. However, having it notarized or witnessed provides stronger evidence that the borrower signed it, making it harder to dispute. Some states require notarization for certain types of loans or amounts. Notarization is always recommended for large loans or loans to non-relatives.
If the borrower defaults, the lender can: (1) Send demand letters; (2) Negotiate a payment plan; (3) Sue in small claims court (up to $5,000-$10,000) or regular court for larger amounts; (4) Obtain a judgment and garnish wages or place liens on property; (5) Report to credit bureaus (if proper disclosures were made); (6) Hire a collection agency. The promissory note is your evidence of the debt. Secured notes (with collateral) allow you to seize the collateral.