{"id":5492,"date":"2016-04-04T10:48:00","date_gmt":"2016-04-04T15:48:00","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/starting-a-business\/promissory-notes.html"},"modified":"2026-06-04T00:20:00","modified_gmt":"2026-06-04T05:20:00","slug":"promissory-notes","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/starting-a-business\/promissory-notes.html","title":{"rendered":"How to Draft a Legally Binding Promissory Note"},"content":{"rendered":"\n
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How to Draft a Legally Binding Promissory Note<\/h1>\n\n
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\n By FindLaw Staff<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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A promissory note is a legal document that records a written promise to pay back money that you\u2019ve been loaned at a certain interest rate over a set period of time.<\/p>\n\n <\/div>\n\n\n\n

Promissory notes<\/span> are used for business loans, real estate<\/span> transactions<\/span>, car purchases, student loans<\/span> and even smaller loans<\/span> among friends and family. There are many ways to structure promissory notes<\/span><\/a>, and each one has its advantages and disadvantages. To figure out which form of promissory note<\/span> will work best for you, it pays to learn more about each type and how it can help and hurt your business.<\/p>\n

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When to Use Promissory Notes<\/span><\/h2>\n

The bottom line is that you should always reduce the terms of any loan<\/a> to writing in the form of a promissory note<\/span>. It doesn\u2019t matter if the loan comes from a bank or your best friend; it\u2019s important to get a loan agreement<\/span> in writing to avoid any misunderstandings.<\/p>\n

The Difference Between Secured <\/span>Promissory Notes<\/span> and Unsecured <\/span>Promissory Notes<\/span><\/h2>\n

There are two types of <\/span>promissory notes<\/span>: secured and unsecured. A secured <\/span>promissory note<\/span> is backed by collateral like a car, house, or other item of value. If the borrower<\/span> does not pay back the principal amount<\/span> and interest, the lender<\/span> can use the collateral to repay the loan. For example, if a bank loans money for your business and takes your house as collateral, they can foreclose on your house if you don\u2019t pay it back. An unsecured note does not have collateral attached to the note. An example is a short-term<\/span> personal loan<\/span> among friends and family; if the borrower<\/span> does not pay back the loan, the lender<\/span> can sue for repayment but not use any collateral to repay the loan contract<\/span>.<\/p>\n

What To Include in a Promissory Note<\/span><\/h2>\n

You should specify all terms of the loan<\/span> in the promissory note<\/span> including the loan amount<\/span>, the interest rate<\/span>, the terms of repayment<\/span> (e.g., installments<\/span>), and the maturity date<\/span> or due date when the loan should be repaid. Check your state laws<\/span> for any particular requirements for a promissory note<\/span>. Banks will provide their own original <\/span>promissory note<\/span>, but if you are getting a loan from a family member or friend<\/a>, you can check out FindLaw\u2019s free promissory note<\/span> template<\/span><\/a> for guidance.<\/p>\n

Promissory Note<\/span> Repayment Schedules<\/span><\/h2>\n

Here are four basic ways to structure a repayment schedule<\/span> on a promissory note<\/span>:<\/p>\n