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Promissory Note Template Guide (Free Download + AI Generator)
Greg Mitchell | Legal consultant at AI Lawyer
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Part of our Financial Agreements series—covering contracts that keep your money deals secure and legally enforceable—this guide explains how to draft a Promissory Note that clearly sets repayment terms and protects all parties. A Promissory Note is a clear, written promise to repay money—how much, to whom, when, and on what terms. Unlike a casual IOU, a note is drafted to be enforceable, so lenders and borrowers know exactly what happens if a payment is missed or the loan is paid off early.
In 2025, with lending happening everywhere—from family help to small-business bridges—courts, banks, and even tax authorities expect clean, dated, signed notes that match the deal and the law.
Download the free Promissory Note template or customize one with our AI Generator—then ask a qualified attorney to review before signing.
Table of Contents
What Is a Promissory Note?
Why You Need One in 2025
Types of Promissory Notes
Legal Context & Enforceability
Key Terms Every Promissory Note Should Include
Step-by-Step: How to Draft Your Note
Secured vs. Unsecured Notes (and Collateral)
Tips to Strengthen Enforceability
Common Mistakes to Avoid
Checklist for a Promissory Note
FAQs
1. What Is a Promissory Note?
A promissory note is a written, unconditional promise by a borrower (the “maker”) to pay a lender (the “payee”) a specified sum, either on demand or by a stated date, sometimes with interest. Under UCC §3-104, a note is a type of negotiable instrument if it meets the statute’s elements (unconditional promise, fixed amount of money, payable to order or bearer, etc.)—features that enhance transferability and enforcement rights.
A note can stand alone or be paired with a loan agreement; many small loans keep everything in one document for simplicity.
2. Why You Need One in 2025?
Money moves fast between friends, family, and founders. But memories blur: Was it a gift? A loan? Was interest due? A signed note ends ambiguity. It also helps with bank diligence (opening business accounts or refinancing) and tax clarity (especially for family loans). For context on how common personal and small-business borrowing is—and why clean documentation matters—explore the Federal Reserve’s Small Business Credit Survey and the New York Fed’s Household Debt & Credit research series at newyorkfed.org. Even without citing numbers, those resources show why written, enforceable terms are the norm, not the exception.
3. Types of Promissory Notes
Simple (lump-sum) note — One repayment on a fixed date, with or without interest.
Installment note — Multiple scheduled payments (amortized), often monthly.
Balloon note — Smaller periodic payments followed by a large final payment.
Demand note — Payable when the lender demands (often with a notice period).
Secured note — Backed by collateral (e.g., equipment, vehicle, or receivables).
Convertible note (advanced topic) — Debt that can convert to equity (common in startups; usually paired with separate terms).
Choose the structure that matches cash flow and risk. For family loans or founder loans, installment or balloon formats with a clear calendar often work best.
4. Legal Context & Enforceability
Negotiability and core elements. The UCC (Article 3) lays out what makes a note negotiable and how it’s enforced (endorsements, holders in due course, defenses). Start with UCC §3-104 and related sections.
E-signatures & electronic records. Under the federal E-SIGN Act and state UETA laws, a contract or signature cannot be denied because it’s electronic, provided the parties consent and you retain the record. That means reputable e-signature platforms can keep your note enforceable. Read 15 U.S.C. §7001.
Consumer-credit disclosures. If your note is consumer-purpose and you charge a finance charge or set more than four installments, the Truth in Lending Act/Regulation Z may require standardized disclosures (APR, finance charge, payment schedule).
Usury & state lending rules. States limit interest for consumer loans and sometimes require lender licensing beyond casual, one-off lending. Verify your state usury cap and licensing thresholds before finalizing rates and fees.
Family loans & the IRS AFR. To avoid imputed interest or gift-tax issues, many families peg interest at or above the IRS Applicable Federal Rate (AFR).
5. Key Terms Every Promissory Note Should Include
Parties & addresses (full legal names and mailing addresses).
Principal amount (in numbers and words).
Purpose (consumer vs. business—affects disclosures and usury).
Interest rate & APR (fixed or variable; compounding; caps; reference rate if needed).
Repayment schedule (dates, amounts, amortization; any balloon).
Payment method (ACH, wire, check; who pays processing fees).
Late fees & default interest (grace period, amount/percent, when it applies).
Default & remedies (missed payment, NSF, insolvency; acceleration; costs/fees where allowed).
Prepayment (allowed any time? with/without penalty?).
Security/collateral (if any; precise description; cross-reference a security agreement).
Governing law & forum (state law; court venue or arbitration).
Notices (where/how official notices are delivered).
Signatures & date (wet-ink or compliant e-signature with consent language).
6. Step-by-Step: How to Draft Your Note
Step 1 — Identify the parties and the deal: Name the maker and payee with full legal names, include mailing addresses, and briefly state the purpose (consumer or business). Purpose influences TILA/Reg Z and usury analysis.
Step 2 — State principal and interest clearly: Write the principal in numbers and words. If this is a family loan, consider referencing the monthly IRS AFR so the rate is defensible for tax purposes.
Step 3 — Build the payment schedule: Use calendar dates and amounts. For installment notes, attach an amortization table; for balloons, state the exact balloon date and amount.
Step 4 — Add fees, grace, and default interest: A short grace period (e.g., 5–10 days) is common. Define late fee logic (flat fee or percentage) and default interest (e.g., +3% above the note rate after default), ensuring compliance with state usury limits.
Step 5 — Draft default and acceleration language: List default events and allow the lender to accelerate the entire balance after notice and a short cure window.
Step 6 — Decide on security: If the loan is significant, consider collateral and a separate security agreement. For collateral in personal property, your lawyer may perfect a lien under UCC Article 9.
Step 7 — Choose governing law and forum: Select a state’s law and where disputes are heard (courts or arbitration). Many parties prefer a mediation step first to preserve relationships.
Step 8 — Execute and keep records (paper or e-sign): Under E-SIGN/UETA, a properly consented e-signature is valid—save the audit trail and a final PDF for your file.
7. Secured vs. Unsecured Notes (and Collateral)
Unsecured notes rely on the borrower’s promise, credit profile, and any guarantor. They’re faster to sign but offer fewer recovery tools if the borrower defaults.
Secured notes are backed by collateral (vehicle, equipment, accounts receivable, or even a deposit account). The collateral description must be specific, and the lender’s interest is typically perfected under UCC Article 9 (often by filing a UCC-1 financing statement). If default occurs, Article 9 provides rules for repossession or disposition of collateral—another reason to keep the paper trail exact (see Article 9 overview at Cornell LII).
For real-property collateral, you’re in mortgage/deed of trust territory—handled with separate, state-specific instruments.
8. Tips to Strengthen Enforceability
Use plain English. Courts favor clear, unambiguous terms over jargon.
Anchor to calendar dates. “Due on the 1st of each month” beats “on completion.”
Match law to purpose. Consumer-purpose loans may trigger TILA/Reg Z; business-purpose loans usually don’t.
Confirm authority. If the borrower is an entity, an authorized signer must execute (board/manager consent where relevant).
Keep the paper trail. Store the signed note, payment receipts, and (for e-sign) the ESIGN/UETA audit trail.
Mind usury and fees. Check state caps and prohibited charges before finalizing rates and late-fee logic.
Plan for change. Add an amendments-in-writing clause so future tweaks don’t undermine the note.
9. Common Mistakes to Avoid
No maturity date or schedule. Ambiguity invites disputes and weakens enforcement.
Missing default/acceleration clause. Without it, you have little leverage after a missed payment.
Usurious rates or unlawful fees. Consumer notes with excessive rates or improper fees risk being void or penalized under state law.
Ignoring electronic-contract rules. If you use e-sign, get consent and retain records (E-SIGN/UETA).
Overlooking collateral paperwork. A “secured” note without a matching security agreement and, where required, UCC-1 filing may leave you unsecured in practice.
Confession-of-judgment clauses. These are restricted or prohibited in many states for consumer/pre-dispute contexts—avoid unless local counsel confirms they’re lawful in your scenario.
10. Checklist for a Promissory Note
Full legal names and addresses of maker and payee.
Principal amount in numbers and words.
Interest rate/APR, compounding, and whether variable or fixed.
Repayment schedule (dates, amounts; attach amortization if needed).
Late fee terms, grace period, and default interest.
Prepayment rights (with or without penalty).
Default events, cure window, and acceleration rights.
Security/collateral description or “unsecured” statement.
Governing law, venue/arbitration, and cost shifting (if allowed).
Notices (email and postal; when notice is effective).
Signatures (wet ink or e-signature) and date.
Attachments (amortization table, bank/ACH instructions, collateral schedule).
Download the Full Checklist Here
11. FAQs About Promissory Note
Q: Do we need notarization or witnesses?
A: In most states, neither is required for a promissory note to be enforceable. However, notarization can add evidentiary strength and may be customary for larger or more formal transactions.
Q: Is a promissory note the same as a loan agreement?
A: Not exactly. A promissory note is the borrower’s unconditional promise to repay a specific amount, while a loan agreement may include broader terms—such as covenants, reporting obligations, or collateral provisions. For smaller or simpler loans, both can be combined into one document.
Q: Can we sign electronically?
A: Yes—electronic signatures are valid if they meet the requirements of the E-SIGN Act and UETA, including mutual consent to transact electronically, secure identity verification, and proper record retention. Using a reputable e-signature platform ensures compliance and provides an audit trail.
Q: What interest rate can we charge?
A: That depends on your state’s usury limits and whether the loan is for consumer or business purposes. Consumer loans are generally subject to stricter caps, while business loans may have more flexibility. Always check local law or consult an attorney before finalizing rates.
Q: How do we handle family loans for tax purposes?
A: For larger or longer-term family loans, charging at least the IRS Applicable Federal Rate (AFR) can help avoid imputed interest and potential gift-tax issues. Document the terms clearly in a signed note and keep a record of all payments.
Q: Does a secured promissory note require extra paperwork?
A: Yes—if the note is secured by collateral, you’ll generally need a separate security agreement and, for personal property, a UCC-1 financing statement to perfect the lender’s interest. Without these, the lender may be considered unsecured in practice.
Disclaimer
This guide is for informational purposes only and does not constitute legal, tax, or accounting advice. Laws vary by state and situation. Always consult a qualified attorney (and tax advisor, for family loans) before preparing, signing, modifying, or enforcing a promissory note.
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A precise Promissory Note preserves relationships, prevents misunderstandings, and makes enforcement straightforward. Download the free template or customize one with our AI Generator—then ask a local attorney to confirm your interest, fees, and signature process.
For more templates and guides on securing loans, repayments, and other money agreements, explore our Financial Agreements collection.
