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Most of us have written an informal promissory note at some point when we lend someone money.
However, if you borrow a large amount of money, e.g. For example, a personal loan to family or friends, it’s a good idea to write a formal promissory note as if you were a bank lender. Writing a formal promissory note also benefits the borrower. He gives them a written contract that regulates the cost of the loan, repayment obligations and any collateral that may be required.
Here’s what you need to know to write a promissory note for a personal loan.
What is a promissory note?
If you’ve ever borrowed money from a lender, chances are you’ve signed a promissory note.
A promissory note is a legally binding agreement that sets out all the details of the loan. It is a contract that contains the loan amount, repayment obligations, borrowing costs, and the lender’s options if the borrower fails to repay the loan. When you, the borrower, sign a promissory note, you agree to the terms of the loan and promise to repay it.
We’re most familiar with using promissory notes when taking out a personal loan, student loan, or other type of loan from a bank or lender. But sometimes we also lend money to friends and family. Often we simply lend them money with an unofficial or even verbal promissory note.
But that can easily backfire. What if your nephew skips town with your $5,000, for example? Or what if your aunt takes the sweet time to pay you back when you could really use the money right now? A formal promissory note can help resolve such issues.
When should you use a promissory note?
You should use a promissory note any time you lend someone money that you want repaid. On the other hand, it’s also a good idea to sign a promissory note whenever you borrow money from someone, as they might be upset if you don’t pay it back.
Most people don’t bother signing promissory notes for small amounts, like spotting someone at dinner or filling up a gas tank. But if you’re lending someone a few hundred or thousands of dollars, for example, you should make sure you have a formal promissory note so everyone is on the same page.
How to write a promissory note
Although it’s a legal document, writing a promissory note doesn’t have to be difficult. There are even sites on the internet that offer templates to fill in the blanks, like eForms or LegalZoom.
Basically, a promissory note should contain the following things:
- Name of Lender and Borrower
- loan amount
- Whether the loan is secured or unsecured
- If it is collateralised:
- What is the security?
- When can the lender take possession of the security (e.g. after three months of default? One year?)
- If it is collateralised:
- Payment Amount and Frequency
- Due Date
- Whether the loan has a co-signer and if so, who
If you charge interest on the loan, you can easily calculate the payment amount using an online personal loan calculator. All you need to enter is the loan amount, the term (i.e. how long it will take the borrower to repay it) and the interest rate.
Keep in mind that each state has its own laws about the maximum interest rate you can charge on a loan. These are known as usury laws and you must check them to ensure your loan interest rate is legal if you are charging interest.
Signing and storing a promissory note
It’s often a good idea to have your credit checked by a lawyer to make sure everything is in order and you aren’t inadvertently breaking any laws. However, the involvement of a lawyer is not required for the loan to be valid.
Once you’ve drafted the promissory note, it’s time for everyone to sign it: the lender, the borrower, and the co-signer (if any). Again, it’s a good idea to get professional help like notarizing signatures, but not required. Going to court to sue someone ensures that the other side cannot claim that you forged their signature.
Make sure everyone who signed the promissory note receives a copy for their records. It’s a good idea to make a separate copy and keep it in a safe place, e.g. B. in a locked filing cabinet and/or on the hard drive of your computer.
How to make changes to a promissory note
It’s okay if you need to make changes to your promissory note, but you must first get everyone’s permission to do so.
The easiest way to customize the contract is usually to simply write a second document to supplement the original document. Note the changes, be it the interest rate, payment amount, or something else. Then have everyone re-sign that copy and give everyone a copy of the change. That way it still holds up in court if ever needed.
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