How To Write a Promissory Note for a Personal Loan (2024 Guide) (2024)

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As a legally binding document, a promissory note holds the borrower and lender accountable to the agreed-upon terms. Promissory notes clearly define essential loan details, including:

• Loan amount
• Interest rate
• Repayment schedule
• Specific terms or conditions, like prepayment penalties

In the unfortunate event of a loan default or disagreement, a promissory note can be used as evidence in court to enforce the loan terms. This document gives lenders a legal basis to pursue repayment and borrowers a mechanism to defend their rights if necessary.

When you take out a personal loan from a bank or online lender, you’ll sign a promissory note. But they’re also valuable in more informal situations.

To ensure smooth transactions and safeguard your financial interests, you must understand when and why you should use a promissory note. Not having one could lead to misunderstandings and disputes, leaving you legally vulnerable and damaging relationships irrevocably.

When lending money to a friend or family member, relying on trust or an IOU alone is easy. However, even in close relationships, financial disagreements can arise. Using a promissory note establishes clarity and boundaries, reducing the risk of strained relationships due to misunderstandings.

A promissory note is a vital document that formalizes a personal loan agreement, ensuring both borrowers and lenders are on the same page. Creating a well-structured promissory note is essential whether you’re borrowing from a friend, family member or private party.

1. State both parties’ names and contact information: This information should include full legal names, addresses and contact numbers. Ensuring accurate identification is crucial for the note’s validity.
2. Specify the exact amount of money being lent or borrowed: Be explicit and use both numerical and written representations to avoid any confusion. For example, if the loan amount is $5,000, write it as “Five Thousand Dollars ($5,000).”
3. State the interest rate: If the loan carries an interest rate, it should be clearly specified in the promissory note. Specify whether the interest is a fixed rate or variable, and if it is variable, explain how it will be calculated. For example, “An annual interest rate of 5% will apply to this loan.”
4. Detail the repayment terms: The terms should include the schedule and frequency of payments. Specify whether the loan will be repaid in installments or lump sum. For instance, “The borrower agrees to repay the lender in equal monthly payments of $250.”
5. Specify the time frame: Include the due date for the first payment, any subsequent payments and the maturity date. Ensure that due dates are unambiguous. For example, “The first installment is due on October 1, 20XX, with subsequent monthly payments due on the same day of each month after that.”
6. Outline additional terms: If there are any additional terms, conditions or clauses relevant to the loan, they should be clearly stated, including provisions regarding late payment fees, default terms, prepayment options or collateral, if applicable.

Once you’ve carefully crafted a promissory note for your personal loan agreement, the next steps are signing it and securely storing it.

Signing a Promissory Note

Signing a promissory note is a straightforward process that involves both the borrower and the lender. Ensure both parties are present and willing to sign the promissory note simultaneously, either in person or remotely, depending on your preference and your state’s legal requirements.

Before signing, carefully review the entire promissory note with all parties involved. Ensure everyone understands the terms, including the full amount, interest rate (if applicable), repayment schedule and additional clauses. Once both parties are satisfied with the terms, the borrower and lender should sign and date the promissory note in the designated spaces provided. This action formalizes the agreement.

Storing a Promissory Note

If you sign a physical document, make photocopies or scans of the signed promissory note. Each party should keep a copy in a safe and easily accessible place. If you use electronic signatures, ensure that both parties receive digital copies of the signed promissory note.

Protect your financial interests by storing physical copies securely, such as in a locked filing cabinet or a fireproof safe. Digital copies should be kept on secure, password-protected devices or cloud storage with robust security features. Create backup copies of digital files and store them separately to prevent data loss due to technical issues. Ensure that trusted individuals, such as a spouse or legal representative, know the location and access details of the promissory note copies in case of an emergency.

Modifying a promissory note should involve a mutual agreement between the borrower and the lender. Emphasize that changes cannot be unilaterally imposed by one party. Mutual consent ensures fairness and transparency in the process.

1. Review the original promissory note: Understand the current terms and conditions, including the payment amount, interest rate (if any), payment schedule and additional clauses or provisions.
2. Agree to the changes: Both the borrower and the lender must agree to the proposed changes. Discuss the reasons for the modifications and ensure that both parties agree regarding the amendments.
3. Create an Amendment Agreement: Rather than altering the original note directly, it’s best practice to create a separate document called an “Amendment Agreement.” This document should clearly state the changes to the original note.
4. Outline the changes: In the Amendment Agreement, specify the changes in detail. For instance, if you’re altering the interest rate, state the new rate and the effective date of the change. If you’re extending the loan term, detail the new payment schedule.
5. Attach the agreement: Once signed, attach the Amendment Agreement to the original promissory note to ensure that the changes are formally documented alongside the initial terms of the loan. Inform all relevant parties about the modifications.

When drafting a promissory note, use clear, concise and easily understandable language. Avoid legal jargon or complex terminology that may lead to confusion or misinterpretation. Clearly define key terms, such as the loan amount, interest rate (if any), repayment schedule and due dates. Leave no room for ambiguity or multiple interpretations.

While it’s possible to draft a promissory note yourself, it’s highly advisable to consult legal professionals, such as an attorney or notary, to ensure the document complies with local laws and regulations.

Promissory notes are legal documents that outline the terms and conditions of personal loans. They serve as written promises from borrowers to lenders. They clarify loan agreements and specify essential details such as the loan amount, interest rates (if any), repayment schedules and due dates. This clarity reduces misunderstandings and disputes.

In personal finance, informed decisions are your greatest asset. As you consider using promissory notes, take the time to understand the loan terms, interest rates and repayment schedules. Knowledge empowers you to make wise financial choices. Consult financial advisors or legal professionals when dealing with significant loans or complex agreements.

Learn more about Joseph Widenhofer

Joseph Widenhofer is a freelance copywriter and editor focusing on economic development, personal finance, schools and boards of developmental disabilities. He primarily works for the Golden Shovel Agency, a full-service virtual agency, as a short- and long-form content writer, as well as a website copywriter tasked with showcasing the positive impact of Economic Development Organizations and how they improve the lives of everyone in their community.

When he’s not writing, Joseph is going on adventures with his wife and dog, reading sci-fi and fantasy novels, listening to investing podcasts and regularly exercising. Connect with him on LinkedIn.

Learn more about Jen Hubley Luckwaldt