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A promissory note is a crucial document for large transactions. It is used by businesses in consumer lending and other businesses. Some other examples of transactions where the promissory note can be used include home purchases and student loans. Owing to the importance of promissory note, it must be created correctly so that it serves the purpose for which it was intended. It must specify the method of payment and at the same time be simple but reflect the terms of the agreement. These components make the note legally enforceable. Below are some tips t you should consider when writing a promissory note:

  1. Meet the needed elements of a legally enforceable promissory note

For a promissory note to be enforceable, it must contain some crucial elements. Without such components, collecting money loaned might be futile. These elements include:

  • The amount you loaned -the amount borrowed or owed
  • Date of repayment- The date which the payment must be made
  • Interest rates – This is the rate which the lender will charge on the borrowed money calculated by annual percentage rate (APR)
  • Amount after interest (calculated as principal + interest)
  • Collateral or agreed security (goods or services used as a guarantee for debts to be paid)
  • Terms for late repayment – What happens in case the agreed repayment made late
  • Terms for defaulting – What will happen if the borrower fails to pay
  • Signature
  1. List down the terms of the agreement

The terms of agreement are the things that the lender and the borrower agree upon. These terms should cover the elements listed above. The terms of agreement should be specific and must contain the repayment schedule which can be weekly or monthly basis, etc.

  1. Chose either secured or unsecured promissory note for repayment

In a secured promissory note, the borrower provides collateral in terms of goods, services or property which is to be taken in case he/she defaults repaying. Usually, the collateral’s value is equal to or greater than the debt’s principal.  An unsecured promissory note, on the other hand, involves no collateral.

  1. Find proper security for your loan

For the case of a secured promissory note, the person borrowing cash has to agree to collateral which can either be property or services. To make sure that you get paid, you should consider filing a financial statement (Form UCC1) to collect loans if a debtor fails to repay or files for bankruptcy. The form should list down the value of the collateral and its description in full.

Ensuring the promissory note is enforceable

  1. Making promissory note enforceable

The note must be signed to make it enforceable. If not signed, it is not legally binding and will not hold in a court of law in case of a dispute. It must also include:

  • Legal names of the parties involved
  • Addresses and phone numbers of each individual involved
  • Signature of the lender, borrower, and the witness
  • Purpose of the money borrowed
  1. Inform the borrower of the right to transfer

The person borrowing the money has a right to be informed that the note is transferable to another party by the lender. However, the original terms of the agreement will remain effective although the debt will be payable to a different party.

  1. The borrower should be informed of the right to cancel the note
  2. Issue a release of a promissory note when the loan is paid back to signify the end of commitment for both parties. Such a release clause helps to prevent future disputes and lawsuits in the future. If collateral which secured such note exists, ensure that every lien is cancelled and terminated appropriately.
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Scott Koegler

Scott Koegler is Executive Editor for PMG360. He is a technology writer and editor with 20+ years experience delivering high value content to readers and publishers. 

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