Promissory Notes For Personal Loans: A Guide

Whether you want to take out a personal loan or formalize a private loan, a promissory note is a legal solution. With a promissory note, the borrower and lender can clearly see the terms of the loan in writing. In most lending situations, you’ll likely sign a promissory note.

Let’s take a look at how promissory notes for personal loans work and the information they hold.

What Is A Promissory Note?

A promissory note is a legal document outlining the repayment terms of a loan agreement. This contract documents in writing the agreed-upon amount of money the borrower promises to pay the lender by a set date. In some cases, you may also hear it referred to as an “IOU,” a promissory loan agreement or, simply, a note.

A few items to look for in the note are the principal amount, interest rate, repayment time frame and the signature of the borrower and the lender.

After signing a promissory note, the borrower has a legal obligation to repay the loan. As the borrower, you’re promising to repay the loan according to the terms of the note. If you can’t repay the loan, a promissory note can help protect the lender from a legal standpoint. For this reason, reading a promissory note is extremely important.

How Does A Promissory Note Work?

Anyone who lends money, including people and companies, can write a promissory note. Promissory notes tend to serve the same purpose on any type of loan: They’re used as a legal debt instrument and hold more weight than a verbal or IOU agreement. However, they’re not as firm as a loan contract stating the recourse that will occur if the borrower fails to repay.

Promissory notes can be secured or unsecured. With a secured promissory note, the borrower must secure the loan with a valuable asset. This collateral protects the lender in the event the borrower doesn’t keep their promise. With an unsecured promissory note, no collateral is put forward on the loan.

In a formal personal loan lending process, you should expect to sign a promissory note. In an informal personal loan scenario between family members or friends, you may not need to sign one. It will depend on the person providing the loan. In most cases, spelling out loan terms with the help of a promissory note is a good idea.

What Is Included In A Promissory Note?

If you plan to sign a promissory note, be sure you understand the items the document should include. Here’s what a promissory note needs to cover:

• The borrower: The document should indicate the name and address of the party obligated to repay the loan or payor. The document also needs to include their signature.
• The lender: The name and address of the payee, or party who’s entitled to repayment, should be clearly indicated. It should also have the lender’s
• Important dates: The document should include the current date. Additionally, it should include the repayment schedule and the loan’s maturity date. Since a personal loan will be an installment loan, the due date of the first payment should be clear.
• Monthly payment amount: Along with the payment due dates, the document should indicate how much you owe for each monthly payment.
• The amount of money borrowed and any collateral: You should see the loan amount, or principal, clearly identified. The same is true for any collateral.
• The APR/interest rate: Most loans will have an APR or interest rate attached to the repayment terms. The document should state the interest rate.
• Additional fees: The promissory note should include any late fees the borrower may incur if they make a late payment. For personal loans, it may also include whether the borrower can expect prepayment penalties if they pay the loan off early.

To avoid surprises for both the borrower and lender, it’s best to make sure all this information is outlined in the promissory note. Before signing on the dotted line, read through everything to confirm that the details of the loan are correct.

Also keep in mind what could happen if the borrower defaults. Although the note will outline the sum of money being borrowed, the consequences in the event of default sometimes aren’t included.

Other Types Of Promissory Notes

Different types of promissory notes exist for different types of loans. For a personal loan, a financial institution or lender may offer a commercial promissory note. In most cases, the note formally outlines the terms of the loan. You’ll likely find the detailed conditions of the loan in a commercial promissory note.

Besides commercial promissory notes, common promissory notes include the ones discussed next.

Informal

Traditional lenders don’t usually offer informal promissory notes, which are typically for loans between family members or friends. Although “informal” is in the name, informal promissory notes offer the lender the same legal protections.

Many online resources are available to help you figure out how to write a promissory note. You can use a promissory note template to ensure you include all the necessary elements.

Investment

If a company is seeking to raise capital for any reason, it can issue a promissory note. The company can then sell the note to investors who are willing to take on the risk.

Real Estate

When you engage in a real estate transaction, a promissory note is usually involved. In this case, it accompanies a mortgage transaction or other type of real estate purchase and serves as your written promise to repay the lender for any funds required to purchase the property.

Like with other promissory notes, you’ll find the interest rate, principal amount and terms of the loan in this document.

Student Loan

When you take out a student loan, some lenders may require you to sign a promissory note. If you get a loan from a private lender, you’ll likely sign several promissory notes. Each will reflect the promise of a particular loan.

If you take out federal student loans, your school may allow you to sign a master promissory note. With that, you can get multiple federal student loans without signing an additional promissory note for each loan. A master promissory note indicates you promise to repay the U.S. Department of Education based on the terms of your specific loans.

FAQs: Promissory Notes For Personal Loans

Let’s explore the answers to some common questions about promissory notes for personal loans.

Does a promissory note need to be notarized?

Notarization isn’t always required for a promissory note to be legally valid, but it can help protect both parties. Each state and local government has its own laws, so check the laws that apply to you to find out whether a promissory note must be notarized. Personal loan lenders may also have policies on whether the promissory note they offer will be notarized.

Is a promissory note legally binding for personal loans?

Promissory notes are legally binding for any loan type, including a personal loan. For a personal loan, this written agreement legally protects the lender if the borrower fails to repay the loan amount.

Who writes the promissory note for personal loans?

When getting a personal loan through a traditional financial institution or lender, the lender typically writes the promissory note. This means the lender is responsible for including all the terms of the agreement in the note. Before signing, take some time to carefully review the details to ensure you and your lender are on the same page.

Final Thoughts

A promissory note is a document most borrowers must sign to finalize a loan. When you sign one, you’re promising to repay the loan.

You’ll find loan details such as the principal, interest rate and specific dates in this document. If you’re the lender, a promissory note can provide legal protection for you if the borrower defaults. Before you agree to any loan terms, be sure to review your promissory note carefully.

If you’re ready to apply for a personal loan, start the application process today with Rocket Loans^SM.