Promissory Note
Promissory Note Generator
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Promissory notes are valid with electronic signatures. For negotiable instruments, consult state UCC provisions.
Sample Promissory Note Generated by Legal Tank
Promissory Note
Parties and Definitions
This Promissory Note (the "Note") is made and entered into as of [____________] (the "Effective Date"), by [____________] (the "Maker"), whose principal address is [____________], in favor of [____________] (the "Payee"), whose principal address is [____________]. As used herein, "Maker" and "Payee" shall include their respective heirs, executors, administrators, legal representatives, successors, and assigns, unless the context otherwise requires.
For purposes of this Note, the following terms shall have the meanings set forth below: "Business Day" means any day other than a Saturday, Sunday, or federal holiday on which commercial banks in the State of [____________] are authorized or required to close. "Default Rate" shall mean the rate specified in Article VI hereof. "Maturity Date" means the date on which all outstanding principal and accrued interest shall be due and payable in full, as set forth in Article IV.
Principal Amount
For value received, Maker unconditionally promises to pay to the order of Payee the principal sum of [$__________] (the "Principal Amount"), together with interest thereon as provided herein, in lawful money of the United States of America, without offset, deduction, or counterclaim. The Principal Amount represents the total sum advanced by Payee to Maker on or before the Effective Date, receipt of which is hereby acknowledged by Maker.
All payments of principal and interest shall be made by Maker to Payee at the address set forth above, or at such other place as Payee may designate in writing from time to time. Payments shall be made by certified check, wire transfer, or ACH electronic funds transfer to an account designated by Payee. Payments received after 5:00 p.m. local time at Payee's address shall be deemed received on the next succeeding Business Day.
Interest Rate
The outstanding Principal Amount shall bear interest at a fixed rate of [____]% per annum (the "Interest Rate"), computed on the basis of a 365-day year and the actual number of days elapsed. Interest shall accrue from and including the Effective Date through and including the date on which the Principal Amount is repaid in full. In no event shall the Interest Rate exceed the maximum rate permitted by applicable usury laws of the State of [____________], and any interest paid in excess of such maximum rate shall be applied to the reduction of principal or refunded to Maker.
Notwithstanding any provision of this Note to the contrary, in the event that a court of competent jurisdiction determines that the Interest Rate or any other charges hereunder exceed the maximum rate or amount permitted by applicable law, including but not limited to the usury statutes of the State of [____________], such rate or amount shall be automatically reduced to the maximum lawful rate or amount, and any excess interest theretofore collected shall be applied to the outstanding Principal Amount or, if the Principal Amount has been paid in full, refunded to Maker.
Payment Terms
Maker shall pay the Principal Amount and all accrued interest in [monthly/quarterly] installments of [$__________] each, commencing on [____________] and continuing on the same day of each successive [month/quarter] thereafter until the Maturity Date of [____________], on which date all remaining unpaid principal, accrued and unpaid interest, and any other amounts due under this Note shall be due and payable in full (the "Balloon Payment"). Each installment payment shall be applied first to accrued interest and then to the reduction of the outstanding Principal Amount.
If any payment due date falls on a day that is not a Business Day, such payment shall be due on the next succeeding Business Day, and additional interest shall accrue for such extended period. Maker shall pay a late charge equal to [____]% of any installment payment not received within [____] calendar days after the date such payment is due (the "Late Charge"), which Late Charge shall constitute liquidated damages and not a penalty. Maker acknowledges that late payments will cause Payee to incur costs not contemplated under this Note, and the Late Charge represents a reasonable estimate of such costs.
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Prepayment
Maker may prepay the outstanding Principal Amount, in whole or in part, at any time without premium or penalty, upon not less than [____] days' prior written notice to Payee specifying the intended prepayment date and the amount to be prepaid. Any partial prepayment shall be applied to the outstanding Principal Amount in the inverse order of maturity unless otherwise agreed in writing by Payee. Accrued interest on the prepaid principal shall be paid through and including the date of prepayment.
No partial prepayment shall relieve Maker of the obligation to make regularly scheduled installment payments as provided in Article IV until the Principal Amount and all accrued interest have been paid in full. Following any partial prepayment, Payee shall, upon written request from Maker, provide a written statement of the remaining Principal Amount and the revised payment schedule, if applicable.
Default
The occurrence of any one or more of the following events shall constitute an "Event of Default" under this Note: (a) Maker's failure to make any payment of principal, interest, or other amount due hereunder within [____] days after the date when due; (b) Maker's breach of any representation, warranty, covenant, or obligation contained in this Note; (c) the filing by or against Maker of any petition under the United States Bankruptcy Code (Title 11 U.S.C.), or any state insolvency law, or the appointment of a receiver, trustee, or custodian for any substantial part of Maker's property; (d) the entry of any judgment against Maker in excess of [$__________] that remains unsatisfied or unstayed for a period of [____] days; or (e) the death or legal incapacity of Maker, if an individual.
Upon the occurrence of an Event of Default, the outstanding Principal Amount shall, at Payee's option, bear interest at the Default Rate of [____]% per annum or the maximum rate permitted by applicable law, whichever is less (the "Default Rate"), from the date of such Event of Default until the date all amounts due hereunder are paid in full. The Default Rate shall apply in addition to, and not in lieu of, any Late Charges assessed under Article IV.
Acceleration
Upon the occurrence of any Event of Default described in Article VI, Payee may, at Payee's sole option and without further notice or demand (except as may be required by applicable law), declare the entire unpaid Principal Amount, together with all accrued and unpaid interest, Late Charges, and all other amounts due under this Note, to be immediately due and payable in full (the "Acceleration"). Notwithstanding the foregoing, upon the occurrence of an Event of Default described in Section 6.1(c), the outstanding Principal Amount and all other amounts due hereunder shall be automatically accelerated and immediately due and payable without any notice, demand, or action by Payee.
Payee's failure or delay in exercising any right or remedy under this Note, including the right to accelerate, shall not constitute a waiver thereof, nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. All rights and remedies of Payee under this Note are cumulative and are in addition to all other rights and remedies provided by law or in equity.
Waivers
Maker hereby waives presentment for payment, demand, notice of dishonor, protest, and notice of protest with respect to this Note, and all other notices or demands in connection with the delivery, acceptance, performance, default, or enforcement of this Note, to the fullest extent permitted by the Uniform Commercial Code as adopted in the State of [____________] and all other applicable laws. Maker further waives all rights to claim or assert any homestead or other exemption rights under applicable federal or state law to prevent the satisfaction of any judgment obtained by Payee in connection with this Note.
No waiver by Payee of any provision of this Note shall be deemed a waiver of any other provision or of any subsequent breach of the same or any other provision. Any waiver must be in writing and signed by Payee to be effective. Maker agrees that the obligations under this Note are absolute and unconditional and shall not be subject to any right of set-off, counterclaim, recoupment, defense, or abatement.
Governing Law and Dispute Resolution
This Note shall be governed by and construed in accordance with the laws of the State of [____________], without giving effect to principles of conflicts of law that would require the application of the laws of another jurisdiction. Maker irrevocably consents to the exclusive jurisdiction and venue of the state and federal courts located in [____________] County, [____________], for any action or proceeding arising out of or relating to this Note, and waives any objection to such jurisdiction or venue, including on grounds of inconvenient forum.
In the event Payee commences any action or proceeding to enforce this Note or collect any amounts due hereunder, Maker shall pay all reasonable attorneys' fees, court costs, and collection expenses incurred by Payee in connection therewith, whether or not suit is filed, including fees and costs incurred in connection with any appeal, bankruptcy proceeding, or post-judgment collection action. This Note may not be modified, amended, or supplemented except by a written instrument signed by both Maker and Payee.
What Is a Promissory Note?
A promissory note is a written financial instrument in which one party, the maker or borrower, makes an unconditional promise to pay a specified sum of money to another party, the payee or lender, either on demand or at a defined future date under stated terms. Governed by Article 3 of the Uniform Commercial Code as adopted by each state, a properly drafted promissory note constitutes a negotiable instrument that can be transferred, sold, or assigned to third parties, giving the holder the legal right to collect the debt. This transferability distinguishes a promissory note from a simple IOU or informal loan agreement.
Promissory notes are categorized as either secured or unsecured. A secured promissory note is backed by collateral - such as real property transferred via a deed or mortgage, a vehicle, equipment, or financial assets - that the lender can seize and sell if the borrower defaults. An unsecured promissory note relies solely on the borrower's creditworthiness and personal promise to repay, without any collateral backing the obligation. Secured notes typically carry lower interest rates because the lender's risk is mitigated by the collateral, while unsecured notes command higher rates to compensate for the greater default risk.
The distinction between a promissory note and a loan agreement is important for both legal and practical purposes. A promissory note is a unilateral instrument - only the borrower signs it, and it contains only the borrower's promise to repay. A loan agreement is a bilateral contract signed by both parties that may include additional provisions such as representations and warranties, covenants, conditions precedent to funding, and detailed default and remedy provisions. For simple loans between individuals or straightforward business lending, a promissory note alone is often sufficient. For complex transactions involving multiple disbursements, ongoing covenants, or significant amounts, a loan agreement accompanied by a promissory note is more appropriate.
Promissory notes must comply with both state and federal lending regulations. State usury laws cap the maximum interest rate that can be charged on loans, and exceeding these limits can render the note void, subject the lender to penalties, and in some states, forfeit the lender's right to collect any interest. The federal Truth in Lending Act (15 U.S.C. § 1601 et seq.) may apply to certain consumer lending transactions, requiring specific disclosures about the annual percentage rate, total finance charges, and total payments. The FTC enforces TILA compliance for non-bank lenders and provides consumer protection guidance on lending disclosures. Understanding these regulatory requirements is essential to creating an enforceable promissory note.
Why You Need a Promissory Note
You are lending money to a family member or friend and need a formal written document that clearly establishes the loan amount, repayment schedule, and interest rate to prevent misunderstandings that could damage the personal relationship.
A small business is borrowing from a private investor or another business and needs a legally enforceable instrument that documents the debt obligation for both parties' accounting, tax reporting, and legal protection. The business's Free llc operating agreement should authorize the member or manager signing the note on the company's behalf.
You are financing the sale of a vehicle, equipment, or other personal property and need a promissory note that documents the buyer's obligation to make installment payments along with provisions for default and repossession.
A real estate transaction involves seller financing, and you need a promissory note secured by a deed of trust or mortgage that establishes the loan terms and gives the seller a lien on the property until the note is paid in full.
You need to formalize an existing informal debt arrangement - where money was lent based on a handshake or verbal promise - with a written instrument that creates a clear legal obligation and establishes enforceable repayment terms.
Related Contracts & Agreements Documents
Promissory Note is often used alongside other contracts & agreements documents. Depending on your situation, you may also need:
Key Sections in a Promissory Note
Principal Amount and Disbursement
This section states the total principal amount of the loan and the terms of disbursement, whether in a single lump sum or in multiple installments. The principal amount is the base sum upon which interest accrues, and clear documentation of this figure prevents disputes about how much was actually lent.
Interest Rate and Calculation Method
The interest clause specifies the annual interest rate, whether interest is simple or compound, how it accrues, and the method of calculation. The stated rate must comply with the applicable state usury limit. Some promissory notes include a variable interest rate tied to a benchmark such as the prime rate, along with a cap on rate increases.
Repayment Schedule and Terms
This section defines how the loan will be repaid - whether through regular installment payments of principal and interest, interest-only payments with a balloon payment at maturity, or a single lump sum payment at the maturity date. The payment due dates, minimum payment amounts, and acceptable payment methods should be clearly stated.
Default Provisions and Acceleration Clause
The default section defines what constitutes a default, such as missed payments, bankruptcy, or breach of other note terms. The acceleration clause allows the lender to declare the entire remaining balance immediately due and payable upon default, rather than waiting for each installment to come due individually.
Late Payment and Prepayment Terms
This provision addresses the consequences of late payment, including any grace period and the amount of late fees. It also states whether the borrower may prepay the note without penalty, which affects the lender's expected return and the borrower's flexibility to retire the debt early.
Security and Collateral (for Secured Notes)
For secured promissory notes, this section identifies the specific collateral pledged, the borrower's obligations to maintain and insure the collateral, and the lender's rights in the event of default, including the right to foreclose on real property or repossess personal property. A separate security agreement or deed of trust may be referenced.
Promissory Note Legal Requirements
The interest rate stated in the promissory note must not exceed the maximum rate permitted by the applicable state usury statute, which varies significantly among states and may differ for consumer and commercial loans.
To qualify as a negotiable instrument under UCC Article 3, the note must contain an unconditional promise to pay a fixed amount of money, be payable on demand or at a definite time, be payable to order or to bearer, and not require any additional act beyond payment of money.
Consumer lending transactions may trigger federal Truth in Lending Act requirements, including disclosure of the annual percentage rate, total interest charges, total number of payments, and the borrower's right to rescind in certain transactions.
For secured promissory notes, the lender must perfect their security interest by filing a UCC-1 financing statement for personal property collateral or recording a mortgage or deed of trust for real property collateral.
Some states require specific language or disclosures in promissory notes involving consumer loans, including notices about the borrower's rights, the availability of prepayment, and the consequences of default.
Common Promissory Note Mistakes to Avoid
Setting an interest rate that exceeds the state's usury limit, which can void the interest provision entirely, subject the lender to civil or criminal penalties, and in some states, make the entire principal amount unrecoverable.
Failing to include a clear acceleration clause, which forces the lender to file a separate collection action for each missed payment rather than being able to demand the entire remaining balance after a single default event.
Omitting a definition of what constitutes default beyond simply failing to make payments, such as the borrower's bankruptcy, death, material misrepresentation, or violation of other note covenants.
Not specifying whether late fees are a fixed amount or a percentage of the overdue payment, and failing to ensure the late fee amount complies with state laws that may cap late charges on consumer loans.
Using vague or informal language that fails to meet the requirements for a negotiable instrument under UCC Article 3, which limits the lender's ability to transfer or sell the note to a third party and may reduce its enforceability.
Frequently Asked Questions About Promissory Notes
What is a promissory note?
Is a promissory note legally enforceable?
What makes a promissory note valid?
What is the difference between a promissory note and a loan agreement?
Does a promissory note need to be notarized?
Can I write my own promissory note?
What happens if someone defaults on a promissory note?
How long is a promissory note valid?
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