Unsecured Promissory Note
Unsecured Promissory Note Generator
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Signature Requirements
Electronic Signature Accepted
Unsecured promissory notes are valid with electronic signatures under the ESIGN Act. Only the borrower's signature is legally required, though both parties typically sign. Notarization is optional but can help prove authenticity if the note is later disputed.
Sample Unsecured Promissory Note Generated by Legal Tank
Unsecured Promissory Note
Parties and Recitals
This Unsecured Promissory Note (the "Note") is made as of [____________] (the "Effective Date") by [____________] (the "Maker"), an individual residing at [____________], in favor of [____________] (the "Payee"), an individual residing at [____________]. This Note is unsecured and is not supported by any collateral, mortgage, deed of trust, or other security instrument. Payee is relying solely on Maker's personal creditworthiness and promise to pay in extending the loan evidenced hereby.
WHEREAS, Payee has agreed to loan to Maker the principal sum set forth herein; and WHEREAS, Maker desires to evidence such indebtedness by this Note; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Maker promises to pay to the order of Payee the amounts and at the times specified in this Note. This Note is not secured by any collateral and Maker's obligations hereunder are general unsecured obligations.
Principal Amount
Maker promises to pay to Payee the principal sum of [$__________] (the "Principal Amount") in lawful money of the United States, together with interest thereon as specified in Article III. The Principal Amount represents the total loan proceeds disbursed by Payee to Maker on or about the Effective Date. Maker acknowledges receipt of the full Principal Amount and agrees that no further advances are contemplated under this Note.
All payments under this Note shall be made to Payee at the address set forth above, or to such other address or account as Payee may designate by written notice to Maker. Payments shall be made by check, electronic funds transfer, or such other method as is mutually agreed upon by the parties. All payments shall be applied first to accrued Late Charges, then to accrued and unpaid interest, and then to principal, unless otherwise directed by Payee in writing.
Interest Rate
The unpaid Principal Amount shall bear simple interest at a rate of [____]% per annum (the "Interest Rate"), calculated on the basis of a 365-day year and actual days elapsed, commencing on the Effective Date. The Interest Rate shall not at any time exceed the maximum rate of interest permitted under the usury laws of the State of [____________], and if any payment of interest would result in interest being charged in excess of such maximum rate, such payment shall automatically be reduced to the amount that results in interest at the maximum lawful rate.
In the event of any usury savings clause adjustment, any excess interest shall be credited against the outstanding Principal Amount, and if the Principal Amount has been paid in full, refunded to Maker. Maker and Payee intend to comply at all times with applicable usury laws. To the extent any interest or other charge under this Note is determined by a court of competent jurisdiction to be usurious, it shall be deemed void ab initio as to the excess and shall not affect the validity of the remaining provisions of this Note.
Payment Terms
Maker shall repay the Principal Amount and accrued interest in [____] equal [monthly/quarterly] installments of [$__________] each, with the first installment due on [____________] and subsequent installments due on the [____] day of each successive [month/quarter]. All outstanding principal, accrued interest, and any other sums due under this Note shall be due and payable in full on [____________] (the "Maturity Date"). Each installment shall consist of principal and interest amortized over the term of this Note.
If any installment payment is not received by Payee within [____] calendar days following the due date thereof, Maker shall pay a late fee equal to [____]% of the overdue amount or [$__________], whichever is greater (the "Late Charge"). The Late Charge shall be immediately due and payable and shall constitute liquidated damages representing a reasonable estimate of Payee's administrative costs resulting from late payment. Collection of the Late Charge shall not waive Payee's right to declare an Event of Default.
View all 9 sections
Prepayment
Maker shall have the right to prepay this Note in whole or in part at any time, and from time to time, without penalty or premium of any kind, upon written notice to Payee at least [____] Business Days prior to the intended prepayment date. Partial prepayments shall be applied to the outstanding Principal Amount and shall reduce future installment amounts proportionally, unless Payee and Maker agree in writing that partial prepayments shall instead reduce the number of remaining installments while maintaining the existing installment amount.
Upon prepayment in full, Payee shall mark this Note "Paid in Full" and return the original executed Note to Maker within [____] Business Days. No partial prepayment shall excuse Maker from paying any installment on the date it becomes due until the entire Principal Amount and all accrued interest have been paid in full. Accrued interest on the prepaid amount shall be calculated through the date of actual receipt of the prepayment by Payee.
Events of Default
Each of the following shall constitute an "Event of Default" hereunder: (a) Maker's failure to make any payment of principal or interest within [____] days after the date when due; (b) any representation or warranty made by Maker in connection with this Note proves to have been false or misleading in any material respect when made; (c) the filing of a petition by or against Maker under the United States Bankruptcy Code (Title 11) or any state insolvency law; (d) Maker's admission in writing of inability to pay debts as they become due; (e) the entry of a judgment or judgments against Maker aggregating in excess of [$__________] that remain undischarged or unstayed for [____] consecutive days.
Upon the occurrence and during the continuance of any Event of Default, the outstanding Principal Amount and all accrued interest shall bear interest at the Default Rate of [____]% per annum, or the maximum rate permitted by applicable law, whichever is less. Payee may, but shall not be required to, provide Maker with written notice specifying the Event of Default and affording Maker a cure period of [____] days from receipt of such notice; provided, however, that no cure period shall be required for Events of Default described in clauses (c) and (d) above, which shall be immediate and non-curable.
Acceleration
Upon the occurrence of any Event of Default, Payee may, at Payee's sole and absolute discretion, declare the entire unpaid Principal Amount, together with all accrued interest, Late Charges, collection costs, and all other amounts due under this Note, to be immediately due and payable without further notice or demand, except as may be required by applicable law (the "Acceleration"). Upon any Event of Default under Section 6.1(c), the Acceleration shall occur automatically without any election or action by Payee.
Following Acceleration, Payee may pursue all available legal and equitable remedies to collect the amounts due hereunder, including but not limited to commencing a civil action for damages, obtaining a prejudgment attachment or garnishment to the extent available under applicable law, and seeking any other relief to which Payee may be entitled. Maker acknowledges that because this Note is unsecured, Payee's remedies are limited to personal recourse against Maker.
Waivers
Maker hereby waives presentment for payment, demand, notice of dishonor, protest, and notice of protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default, or enforcement hereof, to the fullest extent permitted by the Uniform Commercial Code of the State of [____________] and other applicable law. Maker further waives all defenses based on suretyship or impairment of collateral, acknowledging that this Note is unsecured.
No extension of time for payment, forbearance, indulgence, or modification of the terms of this Note granted by Payee to Maker shall operate as a waiver of Payee's rights under this Note or at law. Maker agrees that Payee's acceptance of partial payments or payments marked "paid in full" or with similar notations shall not constitute an accord and satisfaction and shall not waive or impair Payee's right to collect the full amount due hereunder.
Governing Law and Jurisdiction
This Note shall be governed by, construed, and enforced in accordance with the internal laws of the State of [____________], without regard to principles of conflict of laws. Any action, suit, or proceeding arising out of or relating to this Note shall be brought exclusively in the courts of general jurisdiction of [____________] County, State of [____________], or in the United States District Court for the [____________] District of [____________], and each party irrevocably submits to the jurisdiction of such courts.
In the event of any action, suit, or proceeding to enforce this Note, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs from the non-prevailing party, including fees incurred in any appeal or enforcement of judgment. This Note may not be amended, modified, or waived except by a written instrument executed by both Maker and Payee. This Note shall be binding upon the parties and their respective heirs, executors, administrators, successors, and permitted assigns.
What Is a Unsecured Promissory Note?
An unsecured promissory note is a written financial instrument in which a borrower (the maker) unconditionally promises to repay a specified sum of money to a lender (the payee) without pledging any collateral to secure the debt obligation. The lender's sole recourse in the event of default is to pursue a collection action through the court system to obtain a money judgment against the borrower, making the lender's decision to extend credit entirely dependent on the borrower's creditworthiness, income, and reputation. Unsecured promissory notes are governed by UCC Article 3, which establishes the rules for negotiable instruments, including requirements for the instrument's form, transfer, and enforcement. These notes are the most common instrument for personal loans between individuals, family loans, small business lending, and any transaction where the parties prefer simplicity over the complexity of collateral arrangements.
Because unsecured promissory notes carry higher risk for the lender, they typically command higher interest rates than secured obligations to compensate for the absence of collateral protection. The interest rate must comply with the applicable state usury laws, which impose maximum rates that vary significantly by jurisdiction and loan type. For loans between family members or related parties, the IRS requires that the note charge at least the Applicable Federal Rate (AFR) to avoid imputed interest rules under IRC Section 7872. An unsecured promissory note can be structured as an installment note with regular periodic payments, a lump-sum note with a single payment at maturity, or a demand note that allows the lender to require full repayment at any time. Each structure carries different risk profiles and is suitable for different lending relationships. For more complex lending transactions, the parties may prefer a thorough Promissory note form with additional terms and protections.
The enforceability of an unsecured promissory note depends on meeting the requirements for a valid negotiable instrument under UCC Article 3. The note must be in writing, signed by the maker, contain an unconditional promise to pay a fixed or determinable amount of money, be payable on demand or at a definite time, and be payable to order or to bearer. If the note meets these requirements, it qualifies as a negotiable instrument that can be transferred to third parties who may acquire the rights of a holder in due course, which provides enhanced enforcement rights. The statute of limitations for enforcing a promissory note varies by state, typically ranging from three to ten years depending on whether the note is classified as a written contract. A lender should be aware that an expired statute of limitations may bar collection efforts even if the debt remains morally and financially valid.
When a borrower defaults on an unsecured promissory note, the lender's remedies are limited to filing a lawsuit to obtain a default judgment or contested judgment, and then enforcing that judgment through wage garnishment, bank account levies, or property liens. The lender has no right to seize specific assets without first going through the judicial process, which is why careful evaluation of the borrower's ability to repay is critical before extending unsecured credit. The note should include a clear acceleration clause that allows the lender to demand the full balance upon default, as well as provisions for the recovery of attorney fees and court costs incurred in collection efforts. For loans to businesses, the lender may require a personal guarantee from the business owners to provide an additional layer of protection beyond the business entity's obligation. A personal guarantee effectively converts the business's unsecured obligation into a personal obligation of the guarantor, which can be enforced alongside a Service agreement form or other related business documents.
| Feature | Installment Note | Lump-Sum Note | Demand Note |
|---|---|---|---|
| Payment Structure | Regular periodic payments | Single payment at maturity | Full payment when lender demands |
| Borrower Risk | Low, predictable payments | High, large sum due at once | Highest, no guaranteed timeline |
| Lender Risk | Moderate, long repayment period | Higher, borrower may not have funds at maturity | Lowest, can call loan anytime |
| Best For | Personal and business loans | Short-term bridge financing | Lines of credit, related-party loans |
Why You Need a Unsecured Promissory Note
You are lending money to a family member or friend and need a written document to establish the transaction as a bona fide loan rather than a gift, which preserves your ability to claim a bad debt deduction and avoids gift tax implications with the IRS. Review our free unsecured promissory note template for the standard format.
You are extending a personal loan where the borrower does not have specific assets to pledge as collateral, and you want clear documentation of the repayment terms, interest rate, and your remedies in case of default. Our High-quality contract drafting can prepare a customized note that complies with your state's usury laws.
Your business is lending money to another business or individual and needs a formal Sample promissory note documenting the unsecured obligation for accounting, tax reporting, and legal enforcement purposes.
You received an informal promise to repay a loan and want to formalize the arrangement with a written note that creates a legally enforceable obligation with clear terms and remedies. For larger or more complex transactions, consider using a full loan agreement that includes additional covenants and protections.
You are a small business owner who needs to document loans to or from the business for proper bookkeeping, tax compliance, and to maintain the legal distinction between the business entity and its owners. An Sample llc operating agreement may also govern how member loans to the business are treated.
Related Contracts & Agreements Documents
Unsecured Promissory Note is often used alongside other contracts & agreements documents. Depending on your situation, you may also need:
Key Sections in a Unsecured Promissory Note
Promise to Pay
This section contains the maker's unconditional written promise to pay the specified principal amount to the payee. It identifies both parties by full legal name and address, states the exact dollar amount of the obligation, and establishes that the obligation is unsecured with no collateral pledged.
Interest Rate
The interest section specifies the annual interest rate, whether it is fixed or variable, and how interest is calculated. It must comply with applicable state usury laws. For family loans, the rate should meet or exceed the IRS Applicable Federal Rate to avoid imputed interest consequences under IRC Section 7872.
Repayment Schedule
This section defines whether the note is payable in installments, as a lump sum at maturity, or on demand. It specifies payment amounts, due dates, payment frequency, and any balloon payment at maturity. Late payment fees and grace periods before a late fee is assessed are also included.
Default and Acceleration
The default section defines specific events that constitute default, including missed payments, bankruptcy, and material misrepresentation. The acceleration clause allows the lender to declare the entire outstanding balance immediately due and payable upon default, rather than pursuing each missed payment individually.
Attorney Fees and Collection Costs
This provision specifies that the borrower will be responsible for reasonable attorney fees, court costs, and other collection expenses if the lender must pursue legal action to enforce the note. This provision encourages timely repayment and ensures the lender can recover enforcement costs.
Governing Law and Jurisdiction
This section identifies the state whose laws govern the note and the jurisdiction where disputes will be resolved. Proper selection of governing law is important because it determines the applicable usury limits, statute of limitations, and available remedies for the lender.
Unsecured Promissory Note Legal Requirements
UCC Article 3 establishes the requirements for a valid negotiable instrument: the note must be in writing, signed by the maker, contain an unconditional promise to pay a fixed amount, be payable on demand or at a definite time, and be payable to order or to bearer.
State usury laws impose maximum interest rates on promissory notes, and exceeding the applicable ceiling can result in voiding of the interest obligation, forfeiture of all interest, or statutory penalties including treble damages in some jurisdictions.
For loans between related parties, IRC Section 7872 and IRS guidelines require the note to charge at least the Applicable Federal Rate of interest to avoid imputed interest income to the lender and potential gift tax treatment of the below-market interest.
The statute of limitations for enforcing a promissory note varies by state, typically ranging from three to six years for oral agreements and six to ten years for written instruments, and the lender must file suit before the applicable deadline to preserve their enforcement rights.
Under the Statute of Frauds, promissory notes with repayment terms extending beyond one year must be evidenced by a written document signed by the maker to be enforceable, though most notes are written instruments regardless of term length.
Common Unsecured Promissory Note Mistakes to Avoid
Lending a significant amount of money on an unsecured basis without evaluating the borrower's creditworthiness, income stability, and ability to repay, leaving the lender with no practical means of recovery if the borrower defaults.
Failing to include an acceleration clause, which forces the lender to file a separate lawsuit for each missed payment rather than demanding the full outstanding balance upon the first default event.
Not documenting the loan with a written promissory note, particularly for family loans, which makes it nearly impossible to prove the terms of the loan in court and may cause the IRS to treat the transaction as a gift rather than a loan.
Charging an interest rate that exceeds the applicable state usury limit, which can result in forfeiture of all interest, voiding of the note, or statutory penalties depending on the jurisdiction.
Allowing the statute of limitations to expire before taking legal action to collect on a defaulted note, which permanently bars the lender from enforcing the obligation through the court system.
Frequently Asked Questions About Unsecured Promissory Notes
What is an unsecured promissory note?
Is an unsecured promissory note enforceable?
What happens if someone defaults on an unsecured note?
What is a demand promissory note?
Do unsecured notes charge higher interest?
Can you sue on an unsecured promissory note?
What is the statute of limitations on a promissory note?
Should a promissory note be notarized?
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