When two parties enter an agreement to loan and borrow money, it’s important to take care of the details that will make it a binding agreement. A promissory note is the vehicle for a loan, whether it involves a lending institution or private individuals. When you are borrowing money, write a promissory note to spell out all the details of the loan -- you’ll appreciate this document if unpleasant issues pop up along the way.
Title the document “Promissory Note” at the top of the page and centered. Skip one or two lines.
Write “Date:” and place the current date. Write “Borrower:” and place the borrower’s full name. Write “Lender:” and place the lender’s full name. Skip one line.
Write “For value received, the borrower promises to pay the lender” and place the amount of the loan in figures. Write: “Borrower will add interest to the principal at the annual rate of” and place the interest rate with a percent sign. Skip one line.
Detail the repayment schedule that you have worked out in the next paragraph. For example, you might write: “Borrower will pay 24 monthly payments of $275 each on the fifth day of every month beginning July of (current year). The borrower will make the final loan payment in June of (two years from the current year).” Skip one line.
Add additional terms that are agreeable to both parties. You might include a prepayment clause: “The borrower may prepay part or all of the principal without penalty.” You might include a loan acceleration clause: “The lender may accelerate the loan and declare the unpaid principal due in full if the borrower is more than 10 days late with a payment.” You might include a late fee clause: “The lender may add a $25 late fee to the principal if the borrower is more than five days late with a payment.” You might include a payment location clause: “The borrower will remit all payments at (lender’s address).” Skip one line.
List any collateral pledged as security for the loan. If the borrower does not pledge collateral, write: “This is an unsecured loan.” If the borrower pledges collateral, write: “Borrower agrees that until the promissory note is satisfied in full, the loan will be secured by the mortgage associated with (property address).” Add terms about liquidating the collateral to satisfy the debt and about how you will disperse excess liquidated funds, if applicable. Skip one line.
Make signature lines for all borrowers at the bottom of the page. Write full names under each line and add a place for the borrowers to add a date beside their signatures.
Make copies of the promissory note for all lenders and borrowers involved in the loan. All borrowers must sign and date the copies of the promissory note.
- Have a notary witness the signing of the promissory note.
- Jupiterimages/Comstock/Getty Images
- How to Renegotiate an Interest Rate
- How to Reduce an Interest Rate
- Who Pays the Points on an FHA Loan?
- Good Borrowing vs. Bad Borrowing
- How Does an Interest Rate Swap Work?
- What Is the Difference Between an Interest Rate & the Annual Percentage Rate?
- Differences Between Fixed Interest Rate and Floating Interest Rate
- What Is the Difference Between a Permanent & a Temporary Buy Down Agreement?
- How Effective Financing Rates Work
- APR vs. Interest Rate