How To Make a Free Promissory Note

What Is a Promissory Note?

A promissory note is a written promise to pay back a loan. The purpose of a promissory note is to document an otherwise informal IOU so the loan doesn't have issues with enforceability in the event of default.

For example, you can loan a family member $5,000 for a down payment on a house. You can have the borrower promise to pay you back, or you can have them sign a promissory note. If the borrower defaults, it is harder to enforce an oral promise to pay. If you need to take legal action for nonpayment, you should have the terms of the loan formalized in a written agreement.

There are many ways to use a promissory note, such as loaning money to a family member or friend for a small business startup (i.e., a business loan) or giving a personal loan to someone to help buy a car, purchase real estate, or pay for college.

Types of Promissory Notes

There are two types of promissory notes: secured and unsecured. One has collateral to recover against the loan amount, while the other does not.

What Is a Secured Promissory Note?

A secured promissory note has property to secure the loan (called “collateral”). If the loan is not paid back, the lender has rights to the property for the amount of the loan. There are different ways to secure promissory notes with property. For example, if you lent money to someone for a car purchase, you could put a lien on the car title. If the borrower did not pay back the loan, they could not sell the car without your signature.

A typical secured promissory note is a mortgage between two parties. The lender lends the money to the borrower but keeps the title to the property as security until the loan is paid. If the loan is not paid, the lender must foreclose on the property through a judicial process.

A mortgage is different from a deed of trust. In real estate transactions, a “deed of trust” is where the parties agree to have a third party (the “trustee”) hold the property until the loan is repaid.

What Is an Unsecured Promissory Note?

An unsecured promissory note is a promissory note that does not have property to back up the loan. You still have a written promise that is enforceable if the borrower defaults. However, you must file a legal action to recover the amount of money owed. You do not have a claim to the property.

What Does a Promissory Note Include? 

When lending (or borrowing money) with a promissory note, you should know some standard terms of a loan.

• The "principal" is the amount of the loan.

• The "maturity date" is the date the loan is due.

• A “lump sum” is when the loan is paid all at once.

• “Installments" is when the loan is paid in parts, over time.

If you create a promissory note, there are essential provisions to include, such as the following:

• Names and contact information of both the borrower and lender

• The principal amount of the loan and terms of repayment (i.e., lump sum or installments)

• Interest rate (if applicable)

• Payment schedule and due dates

• Late fees and penalties

• Signatures of both parties

• Date of the agreement

Promissory notes do not need signature notarization to be enforceable in court.

How To Create a Promissory Note

When drafting your promissory notes, use simple language and avoid legal jargon. Detail the precise repayment terms and include any conditions for early repayment or defaults. Make sure you: 

• Gather the necessary information. 

• Decide on the type of promissory note. 

• Draft the note using clear and concise language. 

• Review and ensure all legal requirements are met. 

• Have all parties sign and date the document. 

You can use the free promissory note template to get you started.