What You Should Include in a Promissory Note

A promissory note is a written promise that you will pay someone money if they loan it to you. This document will serve as written evidence of the amount borrowed, the repayment terms and schedule, and any interest if you plan on charging it.

To start, you have to decide how much you’re going to borrow the person and set up repayment terms.

Charging interest is a good idea because if the IRS finds out about your loan, they can impose interest and make you report it as if you earned it as taxable income.

Things to Include in Your Note

There are a few things you must include in any promissory note, and they are listed below.

  • The Amount of the Loan
  • Repayment Dates
  • Interest Rate
  • Final Amount after Interest has Been Calculated
  • Collateral Hold (If you’re going to go the collateral route to ensure the debt is paid back)
  • Terms of Late or Missed Payments and Consequences
  • Default Terms – What Happens if They Don’t Pay it Back
  • Signatures
  • Witness Signatures

These are all components of a simple promissory note and should be included every time a new note is made or terms are renegotiated.

Make Sure Your Note is Enforceable

If you go through all the trouble of making up a promissory note template, make sure it will hold up in court. You must have it signed by yourself and the person who is borrowing the money. This note should include:

  1. Legal Names of the Lender and Borrower
  • Addresses and Phone Numbers of all Involved Parties
  • Signatures of the Lender, Borrower, and Witnesses
  • What Purpose the Money is Being Borrowed For
  • Points You Must Inform the Borrower About

The borrower on the Promissory Note has the right to know several key facts before they sign.

  • The borrower has a right to know that the note is transferrable to another lender with the same terms.
  1. The borrower has up to three days to cancel after signing the note.
  2. The borrower has the right to know the final total of the note, including interest.
  3. If there are options to consolidate the note or notes, the borrower has the right to know the terms.

Release of the Promissory Note

Once the loan is paid back, write up a Release of Promissory Note. The Release Note informs the lender the contract if up and releases them from any further liability. A Release of Promissory Note will give closure to the deal, and make sure both parties are satisfied with the outcome.

Drawing up a Promissory Note is essential to protect yourself, even if you are borrowing from family or friends. It will prevent any misunderstandings or miscommunications on both parties’ parts while ensuring you get your money paid back as hassle-free as possible.

This story originally appeared on the LegalForms blog.


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