What is a Promissory Note?
A promissory note is a legally binding agreement in which the issuer promises in writing to pay a set amount of money to the payee at a determined point in the future.
In effect, a promissory note is a fancy way of promising to pay someone back. It’s a type of document that is found commonly in many aspects of financial transactions. Sometimes, promissory notes are also called loan agreements or IOUs.
When Are Promissory Notes Useful?
If you are loaning or borrowing money, a promissory note is extremely useful to establish because it clearly outlines the terms of the arrangement, including payment details, interest, late fees, collateral, and timeframes and deadlines.
Another reason you would want to use a promissory note is that it is a legally enforceable document as it creates a legal obligation to repay the loan within the specified time. It can be used for mortgages, student loans, car loans, business and personal loans. In short, you’ll want to use a promissory note if:
- You want to loan money to a friend or family member and want a signed agreement
- You want to borrow money from a family member or friend and you want to show them that you plan to repay the debt
- You are going to loan someone money and you want to charge interest
- You are borrowing money and you want to put up collateral to secure the loan
What to Include in a Promissory Note?
Crucially, a promissory note states all of the relevant terms of the loan. Some of the important information to include in a promissory note would be:
- Contact Information
- The names and addresses of the lender and borrower
- The amount of money being lent
- How payments will be made: lump sum, on demand, or installments
- Interest rates, if applicable
- Frequency of payments
- How often payments are to be made and in what amount or format
- Late Fee
- Will the borrower be charged a late fee and if so, when and how much
- If collateral will be used in the event of failure of payment, then you’ll need to write a description of the property that will be taken as collateral
- Loan Sale
- Can the lender sell the loan?
- Signatures of both parties
Tailor Your Promissory Note to Your Specific Transaction
It’s worth noting that which information and details you need to include in your promissory note are going to vary depending on your specific transaction.
For instance, a simple promissory note may be for a lump sum repayment on a certain date. Let’s say you lent your friend some money and they agree to repay you by the beginning of next month. In that agreement, the full amount is due on that date, and there is no payment schedule to worry about. As for interest, there may or may not be interest involved in the transaction, depending on what agreement you both came to.
A demand promissory note, on the other hand, requires repayment of the loan when the lender asks for the money back, however, typically a reasonable amount of notice is needed.
How to Collect a Debt on a Promissory Note?
Even with a promissory note, there is no guarantee that the person or entity will actually pay you back. However, with a promissory note, you do have several options and courses of actions that you can take to get your money back.
- Talk to them
- Often, it’s best to have a conversation with whoever owes you to figure out what is preventing them from repaying you. If you keep the lines of communication open, then you may be able to come to repayment arrangement
- Send them a letter
- In the letter, include the original terms of the agreement and their signature to the note. Go on to remind them of the terms and request for them to follow through with their side of the arrangement. Sometimes, that kind of reminder is all that is needed.
- Document Everything
- Compile a folder with any notes you have regarding the arrangement, the original note that was signed, and any other correspondence or attempts at communication that you may have made.
- Work with a debt collector
- You can get a debt collector to collect the money for you and then they will take a percent of the amount. Or, alternatively, you can just sell the loan to the debt collector and then they will be responsible for it.
- File a lawsuit
- If all else fails, you can always sue the borrower for the full amount of the debt they owe you.
Promissory Notes Video
We Can Help
At KAASS LAW, we understand accountability and mutual respect with business partners. It can be hard to mix friends and business but it’s always a good idea to keep emotions out of business transactions.
If you or a loved one need help writing a promissory note, or following up to get your payment from the promissory note, our Glendale business lawyers are here to help. We back all of our clients and we invite you to give us a toll free call at (310) 943-1171 to speak to our experienced business lawyers today.
KAASS LAW, 815 E Colorado St #220, Glendale, CA 91205, (310) 943-1171