Q: What is a promissory note and when do I need one?

A promissory note is a written promise by the maker (borrower) to pay a specified sum of money to the payee (lender) under defined terms. You need a promissory note for any loan — whether between individuals, between a business and an individual, or between businesses. Common uses include personal loans between friends or family members, seller financing for real estate or business sales, student loans, auto loans, and business financing. A promissory note transforms an informal promise to repay into a legally enforceable financial instrument that can be used as evidence in court if the borrower defaults.

Q: What is the difference between a secured and unsecured promissory note?

A secured promissory note is backed by specific collateral — such as real estate, a vehicle, equipment, or other assets — that the lender can seize if the borrower defaults. This reduces the lender's risk and typically results in lower interest rates. An unsecured promissory note is backed only by the borrower's promise to pay, with no specific collateral. If the borrower defaults on an unsecured note, the lender must sue for repayment and obtain a court judgment before collecting. Secured notes are recommended for larger loans, while unsecured notes are common for smaller personal loans where the borrower's creditworthiness is sufficient.

Q: What interest rate can I charge on a personal loan?

The maximum allowable interest rate varies by state under usury laws. Most states cap personal loan interest rates between 6% and 25%, though the specifics depend on the loan amount, purpose, and whether the lender is licensed. For example, New York caps civil usury at 16%, while California sets the limit at 10% for personal loans unless the lender is licensed. Charging interest above your state's usury limit can void the interest obligation entirely or even make the loan unenforceable. Some states also impose criminal penalties for extreme usury. Legal Tank's promissory note templates include guidance on state-specific interest rate limits.

Q: Do I need a bill of sale to sell a car?

Requirements vary by state, but a bill of sale is strongly recommended (and often required) for private vehicle sales. Many states — including New York, Pennsylvania, Maryland, and Louisiana — require a bill of sale for vehicle title transfer and registration. Even in states where it is not legally required, a bill of sale provides essential documentation: proof of the sale date, purchase price (important for sales tax calculations), vehicle identification (VIN, make, model, year), buyer and seller information, and an "as-is" disclosure. Without a bill of sale, disputes about the terms of the sale, the vehicle's condition, or ownership can be very difficult to resolve.

Q: How do I enforce a promissory note if someone doesn't pay?

If a borrower defaults on a promissory note , the payee (lender) has several enforcement options: (1) Send a formal demand letter specifying the amount owed and a deadline for payment; (2) For secured notes, follow your state's procedures to seize the collateral described in the security agreement; (3) File a lawsuit for the unpaid principal , accrued interest, late fees, and (if provided in the note) attorney's fees; (4) If you obtain a court judgment, you can garnish wages, levy bank accounts, or place liens on property to collect; (5) Report the debt to credit bureaus. The promissory note itself is your primary evidence, which is why having a properly signed document with clear terms is essential.

Q: What should a bill of sale include?

A comprehensive bill of sale should include: (1) full legal names and addresses of both buyer and seller; (2) date of the transaction; (3) a detailed description of the item being sold — for vehicles, include the VIN, make, model, year, color, mileage, and license plate number; (4) the sale price and payment method; (5) any warranties or "as-is" disclaimers; (6) a statement that the seller has the legal right to sell the item; (7) any liens or encumbrances on the item; (8) signatures of both parties; and (9) notarization if required by your state. For vehicles, you may also need an odometer disclosure statement and emissions/safety inspection documentation.

Question 1

What is a promissory note and when do I need one?

Accepted Answer

A promissory note is a written promise by the maker (borrower) to pay a specified sum of money to the payee (lender) under defined terms. You need a promissory note for any loan — whether between individuals, between a business and an individual, or between businesses. Common uses include personal loans between friends or family members, seller financing for real estate or business sales, student loans, auto loans, and business financing. A promissory note transforms an informal promise to repay into a legally enforceable financial instrument that can be used as evidence in court if the borrower defaults.

Question 2

What is the difference between a secured and unsecured promissory note?

Accepted Answer

A secured promissory note is backed by specific collateral — such as real estate, a vehicle, equipment, or other assets — that the lender can seize if the borrower defaults. This reduces the lender's risk and typically results in lower interest rates. An unsecured promissory note is backed only by the borrower's promise to pay, with no specific collateral. If the borrower defaults on an unsecured note, the lender must sue for repayment and obtain a court judgment before collecting. Secured notes are recommended for larger loans, while unsecured notes are common for smaller personal loans where the borrower's creditworthiness is sufficient.

Question 3

What interest rate can I charge on a personal loan?

Accepted Answer

The maximum allowable interest rate varies by state under usury laws. Most states cap personal loan interest rates between 6% and 25%, though the specifics depend on the loan amount, purpose, and whether the lender is licensed. For example, New York caps civil usury at 16%, while California sets the limit at 10% for personal loans unless the lender is licensed. Charging interest above your state's usury limit can void the interest obligation entirely or even make the loan unenforceable. Some states also impose criminal penalties for extreme usury. Legal Tank's promissory note templates include guidance on state-specific interest rate limits.

Question 4

Do I need a bill of sale to sell a car?

Accepted Answer

Requirements vary by state, but a bill of sale is strongly recommended (and often required) for private vehicle sales. Many states — including New York, Pennsylvania, Maryland, and Louisiana — require a bill of sale for vehicle title transfer and registration. Even in states where it is not legally required, a bill of sale provides essential documentation: proof of the sale date, purchase price (important for sales tax calculations), vehicle identification (VIN, make, model, year), buyer and seller information, and an "as-is" disclosure. Without a bill of sale, disputes about the terms of the sale, the vehicle's condition, or ownership can be very difficult to resolve.

Question 5

How do I enforce a promissory note if someone doesn't pay?

Accepted Answer

If a borrower defaults on a promissory note, the payee (lender) has several enforcement options: (1) Send a formal demand letter specifying the amount owed and a deadline for payment; (2) For secured notes, follow your state's procedures to seize the collateral described in the security agreement; (3) File a lawsuit for the unpaid principal, accrued interest, late fees, and (if provided in the note) attorney's fees; (4) If you obtain a court judgment, you can garnish wages, levy bank accounts, or place liens on property to collect; (5) Report the debt to credit bureaus. The promissory note itself is your primary evidence, which is why having a properly signed document with clear terms is essential.

Question 6

What should a bill of sale include?

Accepted Answer

A comprehensive bill of sale should include: (1) full legal names and addresses of both buyer and seller; (2) date of the transaction; (3) a detailed description of the item being sold — for vehicles, include the VIN, make, model, year, color, mileage, and license plate number; (4) the sale price and payment method; (5) any warranties or "as-is" disclaimers; (6) a statement that the seller has the legal right to sell the item; (7) any liens or encumbrances on the item; (8) signatures of both parties; and (9) notarization if required by your state. For vehicles, you may also need an odometer disclosure statement and emissions/safety inspection documentation.