A promissory note is a written document laying out the terms upon which a loan will be paid back. These are usually informal loans between friends and family, but can also be between businesses and customers although this is less common as formal documents are more often signed in these cases.
A promissory note is a legally binding document and can be used in a court of law if the terms within it are broken, so the borrower whould only sign it if they are happy with the contents.
The promissory note is used to protect the lender who is commonly someone who is lending money as a favour to help someone out and not a professional lender with lots of money allocated for this purpose.
Even if the loan is to someone the lender knows well, a promissory note should always be prepared and signed as it gives peace of mind to the lender who is the one taking all the risk.
An informal promissory note can be handwritten.
The promissory note should contain the following as a minimum:
- The date the loan starts
- The names of the lender and borrower
- The amount borrowed
- The terms upon which it is to be paid back – length of time, number of payments, amount of each payment
- The consequences of not paying back .
The terms of the promissory note once signed are legally binding and cannot be altered during the term of the loan without both parties agreeing and either a new note being written and signed or an addendum (addition), to the exisiting one which should be signed by both parties. It will not be enforeceable without both signatures.
Promissory Note Letter – Sample 1
I [full name] have borrowed the sum of [amount] from [lender’s full name] on [date].
I promise to pay back this amount within [timescale in months or years] which includes interest of [amount – omit if no interest is being charged]
I will pay the amount of [amount] every [month / two weeks / specific dates] by [cash / bank transfer / Paypal etc].
I understand that the loan will be repayable in full (including interest) if during the term of the loan I am late with my payments by more than [5 days on 3 separate occasions – specify terms here]. I further understand that the lender will take legal action to recover the full amount in this instance if I do not pay it back within two weeks of being notified of my default in payments.
The lender promises that they will not require repayment of this loan any earlier than specified within this promissory note as long as the terms have been met.
Signed by Lender – [lender name] and Borrower – [Borrower name]