Lindsay VanSomeren is a personal finance writer based out of Kirkland, Washington. Her work has appeared on Business Insider, Credit Karma, LendingTree, and more.
Lindsay VanSomeren ContributorLindsay VanSomeren is a personal finance writer based out of Kirkland, Washington. Her work has appeared on Business Insider, Credit Karma, LendingTree, and more.
Written By Lindsay VanSomeren ContributorLindsay VanSomeren is a personal finance writer based out of Kirkland, Washington. Her work has appeared on Business Insider, Credit Karma, LendingTree, and more.
Lindsay VanSomeren ContributorLindsay VanSomeren is a personal finance writer based out of Kirkland, Washington. Her work has appeared on Business Insider, Credit Karma, LendingTree, and more.
Contributor Jordan Tarver Lead Editor, Mortgages & LoansJordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor's degree in business finance, his experience as a top perf.
Jordan Tarver Lead Editor, Mortgages & LoansJordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor's degree in business finance, his experience as a top perf.
Jordan Tarver Lead Editor, Mortgages & LoansJordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor's degree in business finance, his experience as a top perf.
Jordan Tarver Lead Editor, Mortgages & LoansJordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor's degree in business finance, his experience as a top perf.
| Lead Editor, Mortgages & Loans
Updated: Jun 10, 2024, 2:37pm
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If you’re lending someone a large amount of money, such as a personal loan to family or friends, writing a promissory note just as if you were a lender from a bank can formalize the process and expectations. Writing a formal promissory note also benefits the borrower, too. It gives them a written agreement that outlines the loan costs, repayment obligations and any required collateral.
Here’s what you need to know to write a promissory note for a personal loan.
If you’ve ever borrowed money from a lender, you’ve likely signed a promissory note.
A promissory note is a legally binding agreement that lays out all the details of the loan. It’s a contract that includes the loan amount, repayment obligations, loan costs and what the lender can do if the borrower doesn’t repay the loan. When you sign a promissory note as a borrower, you agree to the terms of the loan and promise to repay it.
We’re most familiar with using promissory notes when we take out a personal loan, a student loan or some other sort of credit from a bank or lender. But sometimes we lend money to friends and family, too. Often, we simply lend them money with an unofficial or even verbal IOU.
But that can easily backfire. What if your nephew skips town with your $5,000, for example? Or what if your aunt takes her time repaying you when you could really use the money now? Having a formal promissory note in place can help prevent these problems.
You should use a promissory note every time you lend someone money that you’d like to be repaid. On the other side, it’s also beneficial to sign a promissory note anytime you borrow money from someone.
In most cases, promissory notes for small amounts, like spotting someone at dinner or filling up a tank of gas, aren’t necessary. But if you’re going to lend someone a few hundred or thousand dollars, you’ll want to make sure you have a formal promissory note written so everyone is in agreement on the loan terms.
Although it’s a legal document, writing a promissory note doesn’t have to be difficult. There are even websites online that offer fill-in-the-blank templates, like eForms or LegalZoom.
At its most basic level, a promissory note should include the following things:
If you’re charging interest on the loan, you can easily calculate the payment amount using a loan interest calculator. All you’ll need to enter is the loan amount, the term length (i.e., how long the borrower will take to pay it off) 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’ll need to check them to make sure your loan interest rate is legal if you’ll be charging interest.
It’s often a good idea to have a lawyer review your promissory note to make sure everything is valid and you’re not inadvertently violating any laws. However, using a lawyer is not necessary for the loan to be valid.
Once you draft the promissory note, it’s time for everyone to sign it: the lender, the borrower and the co-signer (if there is one). Again, seeking professional help such as notarizing the signatures is a good idea but not required. If you go to court to sue someone, it’ll ensure the other side can’t claim you forged their signature.
Make sure everyone who signed the promissory note gets a copy for their records. It’s a good idea to make a separate copy and keep it in a safe place too, such as in a locked filing cabinet and/or on your computer’s hard drive.
It’s okay if you need to make changes to your promissory note, but to do so, you’ll need to get everyone’s permission first.
To adjust the contract, it’s usually easiest to simply write up a second document as an amendment to the original document. Write down the changes, whether it’s the interest rate, the payment amount or something else. Then, have everyone sign that copy again, and give everyone a copy of the amendment. That way, it’ll still hold up in court if it’s ever needed.
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ContributorLindsay VanSomeren is a personal finance writer based out of Kirkland, Washington. Her work has appeared on Business Insider, Credit Karma, LendingTree, and more.
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