How To Write A Promissory Note

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A note is a agreement to repay a debt. Sometimes referred to as a note, this document is legally enforceable. Taking the time to learn how to write a note , or write an IOU, will help in your collection endeavors.

What Is a Promissory Note?

A note may be a written promise for one person (or company) to pay a selected amount of cash to somebody else . A note includes far more detail than an easy IOU. It lays out all the specifics of the loan, including the quantity , the rate of interest , and when payments are due.

A note is beneficial for both borrowers and lenders. for instance , if your small business borrows money from a loved one , a note makes it clear that the cash may be a loan, not an investment that provides Stilwell a stake within the business. If you’re lending money, it describes exactly how you expect to be repaid, and it helps you enforce your rights if the borrower doesn’t pay.

Secured Versus. Unsecured note

Before writing a note , you want to decide if the loan are going to be secured or unsecured. A secured note is employed if personal estate or land is collateral for the loan. If the borrower doesn’t pay, the lender can take the collateral. for instance , auto loans are usually secured. If you do not make your payments, the lender can repossess your car.

An unsecured note may be a note with none collateral. you’ve got to travel to court to enforce an unsecured note. Short-term loans between friends and relations are usually unsecured.

1. Writing Your Own note

  • Meet the specified elements to make an enforceable note . so as to be enforceable, the note must include certain elements. with none these you’ll not be ready to collect the cash you loaned out. the quantity of the loan — the quantity that’s borrowed and owed.
  • Repayment dates — the date payments are due or the loan must be repaid.
  • rate of interest — the speed charged or paid on borrowed money. Interest rates are calculated in terms of annual percentage rate or APR.
  • Amount after interest has been applied or PI (principle + interest).
  • The Pledge of Security Agreement or Collateral hold. List any goods or services and therefore the value used as a guarantee of the debt to be paid.
  • Terms for late or missed payments, if applicable.
  • Default terms — what is going to happen if the borrower fails to repay during a timely manner.
  • Signature

2. Repayment amount (“principal” and “interest”)

All promissory notes, regardless of how simple, should clearly state the quantity of cash being borrowed (the “principal” amount) that must be paid back. you furthermore may got to decide whether or to not charge interest, and the way often it’ll be compounded (monthly or yearly).

If you’re unsure what rate of interest to charge, visit the Wells Fargo Rate and Payment Calculator, Prosper Loans, or the Lending Club for a comparison of current interest rates for private loans. you’ll use any of their note amortization calculators to calculate the principal and interest payments on a monthly basis for the lifetime of the loan. Note: the bulk of states have usury laws that restrict the rate of interest you’ll charge.

For example, in California and Texas, a promissory note’s rate of interest cannot exceed 10%. as compared , Florida promissory notes can incur an rate of interest of 18% (for amounts but $500,000), or 45% (for loans greater than $500,000). confirm you check the interest requirements in your state before drafting your loan notes.

Payments on the note are usually applied first toward the interest with the rest applied toward the principal amount.

3. Collecting on an Unpaid Note

Take the borrower to small claims court. If you’re owed a modest sum, like $5,000 or less, then this is often a cheap option. you’ll have a far better chance of receiving a number of the funds owed on an unsecured note without having to pay supreme court and attorney fees.

4. Free note Template

Download a free note template below. you’ll prefer to make it either secured, or unsecured:

  • Secured Promissory Note: Use this document if you would like the borrower to comply with hand over property (like jewelry, cars, businesses, or stocks) if they fail to pay back the loan.
  • Unsecured Promissory Note: Use this document if you don’t want the borrower to comply with hand over property if they fail to pay back the loan. Lenders will often demand higher interest rates reciprocally .

Tips

  • If unsure , have your Note checked. Save a Fortune on Agreements and Contracts may be a good start.
  • Once a note has been signed it becomes a legal instrument .

Warnings

  • The lender should remember that an unsecured loan isn’t repayable if the borrower declares Chapter 7 bankruptcy.
How To Write A Promissory Note

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