Promissory Note Information
A Promissory Note is also known as:
- IOU
- Notes Payable
- Demand Note
- Commercial Paper
What is a Promissory Note?
A Promissory Note is a contract that documents a financial promise between two parties. The borrower (the person who receives a loan) promises to pay back a sum to the lender, outlining when and how they will return the borrowed amount.
People typically use Promissory Notes for loans that come from non-traditional money lenders like individuals or companies instead of banks or credit unions. These short- or long-term loans often help people achieve various personal and business goals.
A Promissory Note includes terms such as:
- The principal amount, any interest charges, and the final due date
- Payment dates, penalties for default, and collateral (if any)
- Contact information for each party (can be an individual or a corporation)
What is a payment default?
A payment default is when a borrower fails to make a payment on time, as per the agreed upon schedule. The lender must decide penalties for payment defaults. For instance, the lender may penalize overdue payments by charging late fees or increasing the interest rate. If a borrower misses too many payments and provided collateral, the lender may take the issue to court and seize the collateral to make up for some or all of the remaining amount due.
How do I create a payment plan?
Your payment plan depends on the size of the loan and the final due date for payment. Lenders commonly allow monthly payments at the beginning or end of the month. Instalments should be affordable for both the borrower and the lender, as payments that are either too high or too low could cause issues for both parties.
LawDepot's Loan Agreement template allows you to choose from the following methods of repayment:
- Single repayment: The borrower repays the entire loan amount at once (either by a specific date or upon notice to repay).
- Regular payments: The borrower repays the loan in weekly, monthly, or yearly instalments.
- Other: Specify a non-traditional method of payment, such as allowing the borrower to make payments as they are able.
- Early repayment: In addition to the specified payment schedule, the borrower may make lump sum payments at any time in order to repay the loan early.
- Interest: The lender may charge interest at a certain percentage rate that compounds yearly. If the borrower fails to make a payment on time, the lender may increase the rate of interest or charge a late fee.
When do I need a Promissory Note?
Customize LawDepot’s Promissory Note template to suit a variety of purposes, including:
- Business loans, such as capital for a startup business
- Purchases, such as a vehicle, boat, or furniture
- Real estate loans, such as a down payment on a home
- Student loans for tuition and other educational expenses
- Personal lending between friends or family for debts or bills
How do I enforce a Promissory Note?
Send a Demand LetterDemand Letter to the borrower to enforce your Promissory Note in the event of a missed payment or loan default.
If the borrower does not respond, you can take steps such as:
- Contacting a lawyer and requesting that they provide a letter of collection to the borrower
- Taking legal action against the borrower
- Collecting money through a third party, such as a bank or collection agency
