A promissory note is a form that promises to pay an amount between a borrower and a lender. The party that is making the money available to the debtor takes the risk of not getting their money back in return for obtaining more money at the end of the note by receiving the full balance plus interest. An interest rate is the price the borrower must pay to hold the money for a period of time and is compounded annually.
Secured Promissory Note – For the borrowing of money with an asset of value “securing” the amount loaned such as a vehicle or a home. If the borrower does not pay back the amount within the time-frame suggested the lender will have the right to obtain the property of the borrower. Example – When money is loaned by a Pawn Shop. The borrower offers value in the chance the loan is not paid off by the time it is due. The Pawn Shop would then keep the “secured” asset as full-payment.
Unsecured Promissory Note – Does not allow the lender to secure an asset for money loaned. This means that if the payment is not made by the borrower that the lender would have to either file in small claims court or through other legal process.
I Owe You (IOU) – A receipt acknowledging a debt that is owed with no time-table for payment.
Loan Release Form – When the note has been paid-in-full, the lender should set the borrower free of all liabilities by authorizing a release form.
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
Key Terms & Clauses
Allocation of Payments – Describes how payments shall be made in regards to late fees, interest, and the principle. In our free promissory note, payments shall first pay off any late fees and interest before the principle is credited.
Prepayment – A clause detailing the rules of paying off the loan early, whether it’s the entire loan or individual payments. Some loans may require that the borrower pay a fee in order to “prepay” the loan.
Acceleration – In the event a borrower defaults on the note or on a provision within the note and does not cure the default within the allotted time frame, the lender has the option to demand immediate payment of all outstanding dues from the borrower.
Attorney’s Fees and Costs – The borrower must pay all monies incurred if defaulting on the loan results in the involvement of attorneys and court proceedings. However, if the borrower ends up prevailing in court, no matter the issue, the lender must then pay for all court related costs.
Waiver of Presentments – This is a short clause that implies that the lender does not have to demand payment when payments or the loan is due, the borrower holds the responsibility to make certain that the payments are paid when due. If the borrow does not pay when due, the lender must issue a notice of non-payment. Further, if the borrower refuses to pay the note, the lender shall have the notice of non-payment presented and notarized which may follow with legal proceedings.
Non-Waiver – If for any reason the lender fails or delays to exercise their rights under the terms of the note, it does not signify or deem that they are waiving their rights. For example: The lender delays in responding to the borrower about an upcoming payment due. The non-response by the lender does not give the borrower the right to not make payment on the due date.
Severability – A clause within a promissory note which states that if any provision within the note becomes void or unenforceable, it does not deem the entire note or any other provision within the note invalid.
Integration – States that no other document can effect the terms or validity of your promissory note. Only can your promissory note be amended (edited) if both the lender and borrower sign a written agreement.
Conflicting Terms – States that no other agreement shall have superior legality or control over your promissory note.
Notice – Describes how notices should be delivered to the borrower. It is standard practice for notices to be written and to be delivered either in person or by certified mail with copies and receipts.
Co-Signer – A person who guarantees the loan if the original borrower defaults on the note. Typically if the lender suspects a borrower to be risky, the lender may require the borrower to obtain another credible person to co-sign on the note.
Execution – States that the borrower is the Principal within the the note and severally liable for all dues. If there is a co-signer, both the borrower and the co-signer are equally responsible for paying back the loan.
How to Calculate
As an example lets calculate if a borrower requests a thousand dollars ($1,000) at a rate of six percent (6%) interest over four (4) months. Let’s also say that the payments are to be once per month. The total amount for the loan (principal + interest) would be one-thousand and twenty dollars ($1,020).
- Principal – $1,000;
- Interest Rate – $20 (calculate by multiplying $1,000 * 0.06 = $60, then divide by 3);
- Total – $1,020;
- Payments – $255 per month.
The interest rate is regulated by the State the note is being originated. This is known as the Usury Rate. There is a maximum rate for every State in order to protect consumers from being charged excessively high rates for borrowing money.
Usury Laws By State
- AL – Title 8, Chapter 8
- AK – AS 45.45.010
- AZ – § 44-1201
- AR – § 4-57-104
- CA – Article XV
- CO – § 5-12-101 thru 5-12-103
- CT – Chapter 673
- DE – § 2301
- FL – § 687.03
- GA – Title 7, Chapter 4
- HI – § 478-4
- ID –§ 28-22-104
- IL – 815 ILCS 205/4
- IN – § 24-4.5-3-201
- IA – § 535.2
- KS – § 16-201
- KY – § 360.010
- LA – RS 9:3500
- ME – 9-B §432
- MD – § 12-102
- MA – § M.G.L.A. 271 § 49
- MI – § M.C.L.A. 438.41
- MN – § M.S.A. § 334.01
- MS – § Miss. Code § 75-17-1
- MO – § Mo. St. Title XXVI CH. 408.030
- MT – § MT ST 31-1-107
- NE – § NE ST § 45-101.03
- NV – § NV ST 99.050
- NH – § NH ST § 336:1
- NJ – § NJ ST 31:1-1
- NM – § NM ST § 56-8-3
- NY – § McKinney’s Banking Law § 14-a
- NC – § NC ST § 24-1.1
- ND – § ND ST 47-14-09
- OH – § OH ST § 1343.01
- OK – § OK ST T. 15 § 266
- OR – § OR ST § 82.010
- PA – § PA ST 41 P.S. § 201
- RI – § RI ST § 6-26-2
- SC – § SC ST § 37-3-201
- SD – § SD ST § 54-3-4 & SD ST § 54-3-16
- TN – § TN ST § 47-14-103
- TX – § TX FIN § 303.009
- UT – § UT ST § 15-1-1
- VT – § 9 V.S.A. § 41a
- VA – § VA ST § 6.2-303
- WA – § WA ST 19.52.020
- WV – § WV ST § 47-6-5
- WI – § WI ST 138.05
- WY – § WY ST § 40-14-310
How to Write
Compared to other types of contracts and legal forms, a Promissory Note is far easier to understand. Most people, without any sort of legal knowledge, can understand the basics of this document and fill out on their own behalf. Below we show you how to complete our basic promissory note. This example will take place in the state of New York.
Step 1 – Lender & Borrower
- Complete the Date by entering the day, month, and year. Proceed by entering the name of the Borrower and Lender. Follow with both of your mailing addresses (can be a personal or company address).
- The lender must enter the principal amount of the loan in both words and numbers.
- Submit the interest rate (percentage annually). In this example, we entered 16% because in the state of New York, 16% is the maximum allowed interest rate a lender can charge.
Step 2 – Payments
- Complete the Date by entering the day, month, and year that the full balance of the loan is due. Include interest and late fees (if any).
- You then have two options to select from – Paying back the loan with a Lump Sum or by Installments. Check the box indicating the agreed frequency of repayment and enter the amount. In our example we chose Monthly Installments. Since the loan is being charged 16% interest, the borrower will have to make payments every month in the amount of $97 dollars.
- If you have selected Installments as your repayment option, enter a Late Fee amount in the event the borrower does not make their payments on time. In our example, we opted to make the late fee at a reasonable $25 dollars.
Step 3 – Secure or Unsecure
- As a Lender, the safest type of promissory note to use is by selecting “Secure“. Most pawn shops use this method. In our example, the borrower has used their iPhone 7 as collateral to secure the loan with the Lender. In the event the borrower can’t pay back the loan, the Lender will keep the iPhone 7.
- When planning to loan money to an individual or business, select “Unsecure“. It’s important to have some level of trust in your borrower if you plan to issue an unsecure note.
Step 4 – Co-Signer
- Having a Co-signer ensures the loan will be payed back by another person even if the original borrower faults on the loan. You often see co-signers with Unsecure Promissory Notes due to the absence of collateral. In this example, we selected “No-cosigner” since the borrower took out a secured loan by using his iPhone 7 as collateral.
Step 5 – Governing Law
- This is fairly an easy step. Simply enter the state that will govern your note (loan). This is particularly important due to the Usury Rates differing by state. The state of the individual or business lending the money (the lender) should be entered. In this example, the the lender resides in New York, therefore the state of New York was entered.
Step 6 – Signatures
- The lender, borrower, and a witness should all come together when time comes to sign the note. If there happens to be a co-signer, notify that person to be present as well. Each person must sign, date and print their name in the presence of the witness.