Free Promissory Note Templates (Types & Requirements) – PDF

The promissory note is legally documented between two parties that contains information about the amount that was lent as well as the due maturity date of the payments and the interest rates. It also contains information about the location and time of issuing the promissory note as well as the signatures involved.

Formally it is defined as;

A promissory note can typically be described as a written and enforceable agreement that binds a borrower to pay a lender an agreed-upon sum of money immediately or within a specified period.

The main purpose of the promissory note is to hold the borrower accountable for repaying the principal amount as well as any interest that may have been accrued.

A promissory note helps the lender (typically an investor or bank) hold the borrower accountable for paying back the loan. In addition, promissory notes are useful for maintaining a document containing all the details and terms of the loan both for taxation purposes, and for the benefit of the lender and the borrower.

Alternative names for promissory notes

A promissory note may be referred to by other terms in a written or legal context.
Here are the other terms by which a promissory note is referenced:

• Commercial paper
• Demand notice
• Notes payable
• Debit note.

When does a lender or borrower need a promissory note?

When lending or borrowing money, both the lender and the borrower will benefit immensely from creating a promissory note that can be used to address payment details, collateral late fees, and interest rates. Depending on the purpose there are several subcategories of promissory notes that can be used. These are the most common types of such promissory notes being used normally;

• Student loans.
• Car loans. (vehicle or automobile)
• Investment loans (commercial, business, or bank)
• Personal loans between friends, colleagues, and family.
• Mortgages property down payments or real estate loans.

 Promissory Notes should generally be used for more straightforward loans that require basic repayment structures. However, more complex loans require a loan agreement.

There are basically two types of promissory notes, under the categories of which, several other related promissory documents/notes fall: The secured promissory note and the unsecured promissory note. These are described as:

Here are free promissory note templates that you can download and modify as per your need.

Promissory Note Templates (By States)

Following are links to each state’s usury rate laws that you can consider looking at before charging the interest rate.

State	Laws
Alabama	Ala. Code § 8-8-1
Alaska	Alaska Stat. § 45.45.010
Arizona	Ariz. Rev. Stat. Ann. § 44-1201
Arkansas	Ark. Code Ann. § 4-57-104
California	Cal. Const. Article XV, § 1
Colorado	Colo. Rev. Stat § 5-12-103 and § 5-2-201
Connecticut	Conn. Gen. Stat. § 37-4
Delaware	Del. Code. Ann. tit. 6, § 2301
Florida	Fla. Stat. § 687.03 and § 687.01
Georgia	Ga. Code Ann. § 7-4-2 and § 7-4-18
Hawaii	Haw. Rev. Stat § 478-2, § 478-3, and § 478-4
Idaho	Idaho Code Ann. § 28-22-104
Illinois	815 Ill. Comp. Stat 205/4
Indiana	Ind. Code § 24-4.6-1-102 and § 24-4.5-3-201
Iowa	Iowa Code § 535.2(3)(a)
Kansas	Kan. Stat. Ann. § 16-201 and  §16-207
Kentucky	Ky. Rev. Stat. Ann. § 360.010
Louisiana	La. Rev. Stat. Ann. § 9:3500
Maine	Maine Rev. Stat., titl. 9-B, § 432
Maryland	Md. Code Ann., Com. Law § 12-102 – 103
Massachusetts	Mass. Gen. Law Ch. 107, § 3 and Ch. 271, § 49
Michigan	Mich. Comp. Laws § 438.31
Minnesota	Minn. Stat. § 334.01
Mississippi	Miss. Code Ann. § 75-17-1
Missouri	Mo. Rev. Stat. § 408.030
Montana	Mont. Code Ann. § 31-1-107
Nebraska	Neb. Rev. Stat. § 45-101.03
Nevada	Nev. Rev. Stat. § 99.050
New Hampshire	N.H. Rev. Stat. Ann. § 336:1, § 358-A:2
New Jersey	N.J. Stat. Ann. § 31:1-1
New Mexico	N.M. Stat. Ann. § 56-8-3
New York	N.Y. Gen. Oblig. § 5-501 and N.Y. Banking § 14-A
North Carolina	N.C. Gen. Stat. § 24-1.1
North Dakota	N.D. Cent. Code § 47-14-09
Ohio	Ohio Rev. Code Ann. § 1343.01
Oklahoma	Okla. Stat. tit. 15, §266
Oregon	Or. Rev. Stat. § 82.010
Pennsylvania	41 Pa. Cons. Stat. Ann. § 201
Rhode Island	R.I. Gen. Law § 6-26-2
South Carolina	S.C. Code Ann. § 37-3-201
South Dakota	S.D. Codified Laws § 54-3-4 and § 54-3-16(3)
Tennessee	Tenn. Code Ann. § 47-14-103
Texas	Tex. Fin. Code Ann. § 302.001(b), §303.002
Utah	Utah Code Ann. § 15-1-1
Vermont	Vt. Stat. Ann. tit. 9, § 41a
Virginia	Va. Code Ann. § 6.2-301 and § 6.2-303
Washington	Wash. Rev. Code § 19.52.020
West Virginia	W. Va. Code § 47-6-5
Wisconsin	Wis. Stat. § 138.04
Wyoming	Wyo. Stat. Ann. § 40-14-

A promissory note is legally recognized as a binding document. Hence, it must be done right at all times. An advantage to writing a promissory note is that unlike most contracts, promissory notes are not usually long and complicated. Rather they are short and simple.

The borrower and the lender must first agree upon and specify all the amounts and figures owed as well as the interest, and late fees before entering these figures in the promissory note in order to avoid confusion between both parties. The total interest, as well as monthly payments and final total payout, are the most important elements to be included in the promissory note. To calculate these elements, the lender and the borrower should agree on the principle/method involved as well as the duration of the repayment. Also, the annual interest rate should be agreed upon before finalizing a promissory note.

It is therefore not essential that the borrower and lender should have legal knowledge before filling in a promissory note.
However, there is a need for a few basic essential elements to be kept in mind such as;

Calculate the total interest owed

Calculating the total interest owed by the borrower is the first step to working out the repayment arrangement between the lender and the borrower. The total interest owed is a function of the annual interest and the duration for which the loan is to be paid. Hence, the lender and borrower need to take the repayment time as well as the annual interest into consideration.

To calculate the total interest owed, multiply the principal, which is the borrowed amount by the annual interest rate. If the borrower and the lender agree on a monthly or quarterly payment schedule, the annual interest is divided by the fraction of the year required to repay the loan. For instance, if the payment is due in 3 months since three months is a quarter of a year, the annual interest is divided by 4.

For example: If a lender lends $10,000 to a borrower for 3 months at an annual interest rate of 9%. The first step is to calculate the interest rate over a year which is 9% of $10,000, a total of $900. To get the interest for 3 months, the annual interest of $900 is divided into 4 which is $225. The total interest owed by the borrower is then added to the principal which is 10000 dollars. At the end of the three months, the borrower will be required to pay $10,225 to the lender.

Calculate the final payment amount

The final payment amount is calculated by adding the principal amount to the total interest owed.

For example: If a lender lends $5000 to a borrower over the span of six months at 10% interest. The first step will be to calculate the annual interest which is 10% of 5,000 dollars. 10% of $5000 is $500. The 6 monthly interest is half of the annual interest, a total of $250. To calculate the total amount owed, the initial principal of $5000 is added to the $250 interest giving a total of $5,250.

Calculating the final total payout

The final total payout is the addition of all amounts owed as well as interest and penalty fees. It is essential for the lender and borrower to agree upon how much interest would be paid back on the loan. Furthermore, the lender and the borrower should also determine how much money would be charged when the borrower fails to make a payment before the due date. The final total payout is the total amount the borrower is required to pay to the lender in order to pay off the entire loan.

For example, A lender grants a borrower the sum of $50,000 at a monthly interest of 5%, with a monthly payment, to be paid off in six months. The first step is to calculate the total interest to be paid by the borrower, which is 5% of $50,000. The total interest is $2,500. In the last, the total interest is then added to the principal amount, bringing the total amount to $52,500, all of which should be paid by the borrower by the end of six months.

Calculate the monthly payment

The monthly payment is the amount agreed upon by the lender and the borrower for the borrower to pay to the lender on a designated date every month on installment basis. The monthly payment is typically an even split of the entire amount owed over the duration of the loan. The total monthly payment must pay off the principal amount as well as the interest.

 The monthly payment amount is calculated by adding the money borrowed to the total interest owed and then dividing the total amount by the number of months.

Here’s an example below: A borrower Borrows $300 for 4 months at an annual interest rate of 10%.To calculate the total interest owed, 10% of the initial borrowed amount which is $300. The annual interest is $30. However, the timeline for repaying the loan is 4 months which is 1/3 of a year. The total interest owed is a third of the annual interest which is $30 / 3, a total of $10. To calculate the monthly payment, the total amount owed which is $10 added to $300 is divided by 4 months. $310 ÷ 4 months equals $77.50.

With our detailed and well-researched promissory note templates, the lender and borrower only need to fill in the format.
The following is a quick and simple guide to direct the parties involved in the promissory note agreement.

Decide the terms of the loan

The lender and the borrower should verbally agree upon, and at a later stage, agree to the terms of the loan in the promissory note.
The terms of the loan upon which the lender and the borrower must agree include:

The principal amount

The principal amount refers to the money the lender agrees to lend to the borrower after a mutual agreement, the sum of which must be included in the promissory note.

Interest rate

The interest rate is the agreed-upon fee for borrowing the money. Every state has a maximum amount permitted for the lender to set as their interest rate. Both the lender and borrower should check the interest rate laws in the state to set a favorable and lawful interest rate.

Principal and interest

As far as we have discussed the principal amount and interest rate, it is essential to consider these components while planning the final amount to be repaid back. The lender also needs to decide how much interest will be charged, if any, as well as how the interest will be compounded annually or monthly.

The borrower has two choices: pay back the entire loan with a lump sum, or pay back the loan in installments. The borrower and the lender should decide by checking the box indicating the agreed-upon frequency of payments and indicating the amount. If the borrower opts for a monthly installment as their payment option, the lender may add a late fee charged in the event that the borrower is unable to make payments on time.

Late fees

The late fee should be an agreed-upon payment the borrower is required to pay should the borrower be late in the payment of the loan. This should be decided before the promissory note is prepared as well and then stated in it clearly.

Security

The security is an agreement to provide the lender assurance that the borrower will pay back the loan either in cash or by using the borrower’s assets. The borrower may use items such as vehicles or a second mortgage on the borrower’s home if the borrowed amount is not paid back by the borrower. These items that qualify as security need to be determined and identified. Security is used as a way to guarantee that the lender will either get their money back or something worth the amount lent to the borrower. Security can be used if a credit check is performed, and there are red flags.

Consequences of inability to repay

If the loan is in the form of a secured note, and the borrower is unable or unwilling to pay back the amount owed before the due date, the consequence is that the lender can legally enforce the promissory note and demand that the full amount owed be paid, or take full possession of the collateral. If the borrower fails to pay the full amount owed and the lender wishes to initiate legal action, the promissory note provides the lender with strong evidence.

If the borrower loses the court proceeding, the borrower will be required to pay any additional reasonable costs associated with the collection of the debt which includes the legal fees. If the lender enlists a professional collection agency, the lender will be charged a percentage of the outstanding debt or a flat fee. Hence, the lender may choose to negotiate a debt settlement agreement with the borrower which involves the lender accepting less than the originally-owed amount.

Co-signer

In the event that the borrower is not financially capable of borrowing the agreed-upon loan amount, a second individual can be named as a co-signer. A cosigner serves as an additional assurance that the loan will be paid back by another individual if the original borrower fails to pay back the loan. The cosigner will be liable for the full extent of the amount owed by the borrower as well as all penalties and late fees should the borrower fall short.

Co-signers are often used when the loan is an unsecured loan due to the absence of security in assets. A co-signer must be determined and assigned in mutual consensus.

Perform a credit report

It is an excellent practice for a lender to run a credit report on any potential borrower. This is because borrowers may have an outstanding debt that the lender is unaware of. If the outstanding debt owed by the borrower is child support or an IRS debt, such debt will take precedence over a promissory note. It is therefore essential that a lender performs a credit report before making any type of agreement with a borrower.

The lender is required to obtain written legal permission from the borrower to grant them access to the borrower’s credit. It is advisable for the lender to use a reporting agency that does not charge the lender, but charges the borrower. Experian is a good choice as it charges the borrower $14.95 and provides the lowest score of the three credit bureaus.

Draft the promissory note

Once the lender and borrower have come to an agreement on the main terms of the promissory note, both parties should come together to authorize the formal agreement. The agreed-upon amount should only exchange hands after the promissory note has been signed by all relevant parties.
Here are a few general components to include while preparing the note;

Lender and borrower

The lender and borrower should specify the date by writing the exact day, month, and year in the note. The lender and borrower should also enter their names in the appropriate spaces followed by both mailing addresses. The mailing addresses can be the company address or a personal address. The lender must specify the principal amount of the loan both in numbers and in words.

The annual interest rate percentage should also be specified in accordance with the presiding state laws. Although only the borrower’s signature is required for the promissory notes to be valid, it is a good idea for the lender to also include the signature. The lender may also be referred to as the “issuer”, “maker”, “seller”, or “payee”. The borrower may also be referred to as the “buyer” or “payer”.

Set security

The safest type of promissory note a lender can use is a secure one. The secure method is widely adopted by most pawn shops. By selecting a secure option, the lender requires the borrower to use an asset or valuable item as security for the loan. If for some reason, the borrower is unable to pay back the loan, the lender takes full possession of the asset. For instance: Common assets used for security may include real estate or motor vehicles as well as any type of valuable asset. If real estate is used as security, the security is provided as a first or second mortgage on the property. Using an asset as security implies that if the borrower fails to pay back the funds, then the lender is legally able to obtain full ownership of the asset used as security in the promissory note.

Default clause

The lender and the borrower should specify terms in the unlikely event that the borrower never repays the loan.

Payment arrangement

The arrangement by which the principal and interest will be paid back to the lender should be clearly stated. The maturity date which is the date by which the borrower must pay back the lender should be specified.

Set terms & conditions of repayment

The borrower is advised to repay the borrowed money on or before the agreed-upon time, and in accordance with the set terms of the promissory note. Failure to do this may attract additional fees which will be added to the overall due balance according to the terms of the promissory note. Once the borrower has fully repaid the entire amount to the lender, as well as any interest or fees, the lender is required to create a loan release form which is then issued to the borrower, relieving the borrower of any liability from the promissory note.

Repayment terms

The payment arrangements must include specific details on how the loan amount is to be fully paid. Both the lender and borrower can make an agreement for the borrower to pay back the loan in incremental sums or as a lump sum.

Installments with final balloon payment

Like the installment payment, the installment with the final balloon payment also has a specific due date, however, interest payments are only made at regular intervals, and the principal amount is due on the maturity date. For instance, if a borrower takes a $10,000 loan, with a monthly interest of $500 under the installments with a final Balloon payment plan, the borrower pays $500 monthly applied only towards the interest, and on the due date, the borrower is required to pay the full $10,000 principal.

Due on specific date (“Lump Sum”)

The lump-sum payment plan also has a specific due date; however, the due payment is the entire amount owed. The entire amount owed includes the principal, as well as the interest, all paid at once. For instance, if the borrower takes a $30,000 loan with a $1,000 monthly interest, the Lump sum payment after six months would be the entire $30,000 and the accumulated $1,000 for six months, which is a one-time payment of $36,000.

Due on demand (“payable on demand”)

A payable-on-demand loan has no specific due date. The borrower is required to pay the entire amount owed whenever the lender demands their money back. For instance, if a lender lends a friend or family member $100,000 for business, the entire amount owed is due for repayment at any time the lender requires or whenever financially feasible.

Late payment

In the event that the borrower is unable or unwilling to pay the agreed-upon amount by the end of the established period of time, the lender is advised to issue a demand letter. A demand letter is a form that communicates to the borrower the terms stated in the promissory note referencing the penalty for late payment as well as the new total amount owed after the addition of the late payment fees. The demand letter should also contain a deadline by which the borrower is required to repay the full amount as well as the penalty fee before the borrower is regarded as being in default.

Non-payment conditions

If after the lender has issued a demand letter, and the borrower is still unable to pay the full amount, the borrower is said to be in default on the promissory note. The lender may seek to recover their funds through a small claims court. However, small claims typically are limited to amounts below $10,000. However, these laws vary from state to state. In the event that there was security placed on the note, the lender can take possession of the asset property all valuable used as security in the promissory note. If the value of the loan exceeds $10,000 legal action will likely be necessary.