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What is this loan for? Debts or Bills Real EstateLast Update September 18th, 2024
Loan Promise Note
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Table of Contents:A Promissory Note is a note payable form that a borrower uses to promise to repay the lender.
Promissory Notes have much in common with loan agreements, but the former only binds the borrower and is more informal. They function similarly to IOU notes, detailing information about what one person owes another.
However, Promissory Notes are legally more robust and enforceable, and provide much better protection for lenders.
Different types of Promissory Notes exist. Depending on your situation, one kind may be more suitable than the other.
There are 2 basic types of Promissory Notes:
Promissory Notes are mostly employed for small personal loans or financial agreements between close family and friends.
The following are additional circumstances when Promissory Notes can be appropriate:
Using a legal template allows you to document essential details to make your loan official. This includes the parties involved, when the money must be repaid, and any interest that should be paid on the capital that has been borrowed.
As with many financial tools, Promissory Notes can be the subject of fraudulent activities. Specifically, scams involving business and investment Promissory Notes have significantly increased during the last few years [1].
With the promise of high returns, scammers have been able to defraud millions of dollars with illegitimate Promissory Notes. Examine the following recommendations to avoid falling victim to fraud:
Promissory Notes may be more informal than loan contracts and financing agreements, but they still must be carefully drafted to be a binding contract. As an enforceable legal document, attention should be paid to how it is worded.
Use clear and plain English to draft the document and cover essential information such as the parties' names and when payment will be due.
To be a binding document, a successful Promissory Note contains the following details:
To correctly add this information to your Promissory Note, follow these steps:
Our promissory note template and step-by-step survey will help you create a legally binding and professional document that looks the part and works effectively.
It will help you identify the key information that must be found within your form for it to be valid and enforceable.
Our Promissory Note template and step-by-step survey can act as a reliable foundation to help you create an effective professional document.
Once you have customized your Promissory Note, both parties must sign it. Only then will it be considered legally valid.
Complete the following actions before signing your document:
Confirm that your Promissory Note complies with state laws and requirements before you sign the document.
Similar to loan agreements, loans secured through a Promissory Note can demand a fair interest rate on the principal amount.
Interest protects against borrower payment default, especially if the loan is not secured against any collateral and spreads over a long period. A minimum interest rate, known as the federal reserve rate [3], should be charged to avoid the Internal Revenue Service classifying the loan as a gift.
When using debt instruments that levy interest, it’s important to remember that state usury laws apply. Take this into account when drafting your Promissory Note.
If you have decided to charge interest on the loan amount, ensure you adhere to state laws and regulations.
Refer to our table below to confirm the maximum interest rate in your state:
| State | Law | Maximum Interest Rate |
|---|---|---|
| Alabama | § 8-8-1 | 8% for contracts in writing, 6% for verbal agreements |
| Alaska | § 45.45.010 | 5% above the 12th Federal Reserve District Interest rate on day loan was created, or 10%, whichever is larger (loans less than $25,000). No maximum interest rate exists for amounts over $25,000 |
| Arizona | § 44-1201 | No limit exists for loans in writing 10% per annum for any loans not in writing |
| Arkansas | § 4-57-104 | Cannot exceed the 17% maximum established in the Arkansas Constitution (Amendment 89) |
| California | § Article XV | 10% for personal, family, and household loans. The highest of 10% or 5% over the amount charged by the Federal Reserve Bank of San Francisco |
| Colorado | § 5-12-103 & § 5-2-201 | 45% maximum interest rate for supervised loans 12% maximum interest rate for unsupervised loans |
| Connecticut | § 37-4 | The limit is 12% |
| Delaware | § tit. 6,2301 | 5% limit over the Federal Reserve Discount rate at the time the loan was created |
| Florida | § 687.03 | 18% on loans below $500,000 25% on loans over $500,000 |
| Georgia | § 7-4-2 | 5% per month on amounts over $3,000 7% without a written contract 16% on loans under $3,000 |
| Hawaii | § 478-2, § 478-3, & § 478-4 | 10% limit without a written contract 12% is the general maximum interest rate 10% is the maximum on judgments |
| Idaho | § 28-22-104 | The general maximum rate is 12% The maximum rate on court judgments is 5% |
| Illinois | § 815 ILCS 205/4 | 9% general usury limit |
| Indiana | § 24-4.6-1-102 & § 24-4.5-3-201 | 8% is the maximum without an agreement 25% for consumer loans that are not supervised |
| Iowa | § 535.2(3)(a) | The general maximum interest rate is 5% If the interest |
| Kansas | § 16-201 & §16-207 | 10% legal interest rate 15% general maximum interest |
| Kentucky | § 360.010 | 8% legal rate of interest The maximum interest rate is 4% larger than the Federal Reserve rate (or 19%, whichever is less) There is no limit when stated in a written contract with a loan larger than $15,000 |
| Louisiana | § 9:3500 | 12% general maximum interest rate |
| Maine | § tit. 9-B, § 432 | 6% legal interest rate (no maximum in any statute) |
| Maryland | § 12-102 103 | 6% legal interest rate 8% maximum interest rate with a written contract |
| Massachusetts | § 3 & Ch. 271, § 49 | 6% legal interest rate without a written contract Normally does not go over 20% (if part of the contract) |
| Michigan | § 438.31 | 5% legal rate 7% with a written contract |
| Minnesota | § 334.01 | 6% legal rate of interest 8% maximum interest rate for written contracts No limit if the amount is over $100,000 |
| Mississippi | § 75-17-1 | 8% legal rate of interest The rate may be increased up to 5% or 10% above the Federal Reserve discount with a contract |
| Montana | § 31-1-107 | The highest of 15% or 6% over the Federal Reserve System rate |
| Nebraska | § 45-101.03 | 16% maximum usury rate |
| Nevada | § 99.050 | The least of 36% or the maximum rate allowed under the Military Lending Act |
| New Hampshire | § 336:1, § 358-A:2 | No legal limit exists for interest rates |
| New Jersey | § 31:1-1 | 6% without a written contract 16% with a written contract |
| New Mexico | § 56-8-3 | 15% maximum without a written contract |
| New York | § 5-501 & § 14-A | 6% legal interest rate 16% general usury limit |
| North Carolina | § 24-1 | 8% legal rate Consumers and creditors are allowed a higher contractual rate |
| North Dakota | § 47-14-09 | 5.5% maximum interest rate above the current maturity rate of Treasury bills for six months prior to the issuance of the loan for written contracts less than $35,000, or 7%, whichever amount is greater |
| Ohio | § 1343.01 | 8% interest rate in any written contract |
| Oklahoma | §266 | 6% legal rate of interest without any contract |
| Oregon | § 82.010 | 9% legal interest rate 15% or 5% greater than the 90-day discount rate of commercial paper for business and agricultural loans |
| Pennsylvania | § 201 | 6% interest rate |
| Rhode Island | § 6-26-2 | 21% or domestic prime rate plus 9% maximum interest rate |
| South Carolina | § 37-3-201 | 10% maximum interest rate unless stated otherwise in a contract |
| South Dakota | § 54-3-4 & § 54-3-16(3) | No limit exists for written agreements 12% maximum interest rate without a written agreement |
| Tennessee | § 47-14-103 | 10% maximum interest rate unless stated otherwise in a contract |
| Texas | § 302.001(b) | 10% interest rate Can be higher if the loan is provided by contract law |
| Utah | § 15-1-1 | 10% maximum interest rate unless stated otherwise in a contract |
| Vermont | § 41a | 12% rate of interest unless it falls under a particular circumstance provided in § 41a |
| Virginia | § 6.2-301 & § 6.2-303 | 6% legal rate 12% with a contract |
| Washington | § 19.52.020 | 12% maximum interest rate, or 4% over the average bill rate for 26-week treasury bills in the month the loan took effect |
| Washington D.C. | § Title 29, Chapter 33 | 24% maximum interest rate for written contracts 6% maximum interest rate for verbal contracts |
| West Virginia | § 47-6-5 | 6% legal interest rate 8% maximum interest rate for written agreements |
| Wisconsin | § 138.04 | 5% legal interest rate Interest rates in written agreements can be agreed upon |
| Wyoming | § 40-14-106 | 7% interest rate Interest rates in written agreements can be agreed upon |
Once the debtor has fully repaid the principal amount and interest, complete a Promissory Note release form and provide a copy to the borrower.
This legal form serves as a formal receipt that the debtor has honored the agreement described in the note, releasing them from any further obligations and liabilities.
It is essential to be prepared in the event that the borrower defaults on the loan and does not repay the planned installments.
The situation must be handled carefully to find an adequate solution.
Consider these options in the event of default by the borrower:
If none of these measures work, it may be time for legal action. You should consider suing the borrower in court to recover the money.
When writing a Promissory Note for the first time, it can help to see a real example first. This will assist you in getting a feel for the structure and terminology of a legally binding document.
Check our Promissory Note example document below to get a better idea of how your final form should turn out.
