In order to protect yourself from lawsuits or unfair lending practises, you’ll need a promissory note that can be personalised to your specific needs. If you’re lending or receiving large sums of money, you’ll need a promissory note template that can be modified to your specific needs.
When it comes to being a lender, the absence of a promissory note could mean that there is no evidence or contract that you were ever owed repayment of debt at all. That could be a considerable sum of money that has been thrown to the wind. A borrower who does not have a concrete promissory note may find themselves paying more than they should, or they may even find themselves sued for a false default that did not occur in the first place.
For those looking for a promissory note template that can be easily customised to meet their needs, we are providing not one but two free promissory note templates at the end of this article: one that is basic and one that includes more advanced clauses for payment plans, interest rates, and collateral. Please see the links below for more information. You’ll need to grasp what a promissory note is, how to fill one out, and the legal repercussions of signing one before you can go to the download page.
Create, download, and sign a promissory note in under ten minutes with this template.
What is a promissory note, and how does it work?
Promissory notes are legally enforceable documents that explain a borrower’s and a lender’s “promise to pay” in the event of default. A promissory note must be signed by the borrower, and it must explain the total amount of the debt. If both parties agree, the promissory note might stipulate more specific loan terms.
There is no requirement for a witness or notary in the case of a promissory note (though, neither is a bad idea).
A promissory note varies from an IOU in that it is more formal in appearance.
When the borrower signs an IOU, he or she is merely acknowledging the total amount of the obligation owed. In contrast, an official loan arrangement is a distinct contract that is more sophisticated and regulated than an informal loan agreement. A loan agreement, in contrast to an IOU or a promissory note, must be signed by both the borrower and the lender, and it must include a specific plan for payments, interest rates, and consequences in the event that the borrower defaults.
There are two types of promissory notes: secured promissory notes and unsecured promissory notes. Generally, secured promissory notes require the borrower to put up collateral assets as a means of protecting the lender in the case of a default. There is a section in the secured promissory note template provided at the conclusion of this article where you can specify the collateral and the conditions under which a lender would acquire ownership of it.
Unsecured promissory notes are significantly simpler: the only actual penalties of defaulting on or otherwise failing to make a payment would be a reduction in the borrower’s credit score, which would be temporary. And, of course, the debt could be sent to collectors, which could result in a legal action (if the lender chooses).
When should I use a promissory note and when shouldn’t I?
Not every loan requires the use of a promissory note, and not every promissory note is appropriate for all loan types. We’ll go through why and why you would want to use a promissory note, as well as what happens if you don’t use one.
Promissory notes are usually not necessary when working with banks and mortgage companies. Unless otherwise stated, you should not be concerned with them. They will provide contracts, and all you will have to do is examine them (preferably with the assistance of an attorney) and sign them. A promissory note is required for private investments and some types of real estate transactions, as well as for personal loans made to one another between individuals.
Vehicle sales between private parties, financial loans to family members and friends, and the sale of expensive equipment are all examples of personal loans.
Profitable investments using promissory notes are typically those that include financial injections into small enterprises to assist them in meeting equipment, payroll, real estate, and other expenses.
A promissory note is used to finance real estate transactions in certain situations where a mortgage would otherwise be required. Homebuyers who are unable to obtain a typical mortgage might engage into an arrangement with the current owner of the property by executing a promissory note on the property. The conditions of the loan are determined by the owner of the property, and the property being acquired serves as collateral to protect the buyer’s interest in the loan.
The Different Parts of a Promissory Note
In order to effectively use the promissory note template, it is essential that you fully comprehend each section and phrase of the document. This will not only assist you in filling out the promissory note, but it will also assist you in interpreting a promissory note that has been given to you as well.
CLAUSES that must be included in a promissory note
The following clauses must be included in each promissory note:
A definition of the parties is required in this phrase, which must specify who the borrower and whoever the lender are.
The total amount owed is as follows: In this section, the lender will simply say how much money the borrower owes him, and he or she may or may not describe the cause for the loan (though this is not required).
The signature of the borrower: In order for the promissory note to be valid, the borrower must sign it; however, the lender is not required to do so. This section should include a place for an electronic signature if the contract is digital in nature.
These are all of the clauses that must be included. It is important to note that a promissory note differs from an IOU in that it can be made more sophisticated by incorporating the clauses listed below.
Optional parts of a promissory note include the following:
While these stipulations are optional, it is always a good idea, whether you are a lender or a borrower, to make the terms of the loan as clear as possible. If the debt ever makes it to the courtroom, using clear and explicit wording will help you avoid receiving an unfavourable judgement.
Default clause: This section should specify what happens if the loan is not repaid, including any penalties that the lender may impose on the borrower in the event of nonpayment. For a vehicle, the penalty would almost certainly be repossession, whereas for a piece of real estate, the penalty would almost certainly be foreclosure.
Timetable for debt repayment: When is the total amount of the loan due to be paid in full? Where debt is being paid off in instalments, this clause should specify how much each instalment will cost and how frequently the payments are expected to be made. This clause should, in an ideal world, inform both parties of what will happen if a payment is not received on time. What penalties are there for late payments, and is there a maximum number of late payments that can be forgiven, among other things?
Interest rate: This section would be required for any promissory note that details a debt that will be repaid with interest over time. When both parties are hammering out the terms of the loan (and the note), ask yourself the questions listed below: What is the interest rate in percentage terms? When does the interest start to accrue? This is a clause that a borrower should pay particular attention to.
Secured promissory notes have a section titled “Security and Collateral,” which describes the asset or assets that will be used to secure the loan, as well as the circumstances under which the asset or assets will be seized.
Area for co-signers: For debtors who may not have sufficient credit or collateral, a promissory note may include the option of a co-signer as an alternative. The section would explain how the co-signer would share the responsibility for any fees or penalties that incurred as a result of defaulting or making late payments on the loan. A secure electronic signature would be required in this part if the contract were to be submitted via email or any other digital method.
Now that you’re familiar with the types of clauses you might encounter or require, as well as how they’re utilised, let’s take a minute to discuss the potential loopholes and traps you might encounter as a borrower or a lender.
There are some conditions in which promissory notes can be cancelled.
Promissory notes, like any legal document or contract, include their own set of landmines, which we can help you avoid by identifying them before you design or sign your promissory note. There are a few loopholes, mistakes, and misconceptions that might cause a promissory note to be worthless, and you should be aware of them so that you can prevent them in the future.
A change to the provisions of the note that has not been allowed by the debtor and the borrower must be agreed upon by both parties, whether before or after the note is signed. The note will be void if there is evidence of an unapproved change.
The loss or destruction of the original note: Without a copy of the original note, it is practically hard to bring a lawsuit against a debtor. This is why we advocate using an electronic signature service such as Signeasy, because it ensures that all parties receive digital copies of the promissory note, which can be preserved and backed up at any time.
Defining the debt in terms other than money: Promissory notes are not intended for sale or barter; you cannot promise someone your car in exchange for a debt. If the principle of a loan is not described in legal currency in a promissory note, the note is deemed null and void.
The absence of a signature is ridiculous, but it does happen. Check to see that the borrower and/or any co-signors have signed the promissory note using a wet signature or a digital signature on the real document.
Find out what the laws are in your area regarding promissory notes.
Promissory notes, as well as the regulations that govern them, varies from one country to the next. Before you agree to a promissory note template, we’ll assist you in researching your state and local regulations governing loans and promissory notes.
A promissory note is a type of financial instrument that is covered by the “Negotiable Instruments” section of the Uniform Commercial Code in the United States. We recommend perusing the language of the code itself if you’re planning on a close examination of a promissory note in the US.
Articles 177 and 194 of the Criminal Law of the People’s Republic of China, which deal with the legal repercussions of promissory notes, are in effect in China.
Promissory notes were first specified in India by the Negotiable Instruments Act of 1881, which continues to govern them to this day.
The United Nations Convention On International Bills of Exchange and International Promissory Notes, which covers promissory notes (among many other things) for the vast majority of countries, may be found in its entirety here and can be read in full here. This is an excellent default resource for understanding the minutiae of promissory notes; the document is often used as a template for other nations.