What Do I Need to Know When I Write and Structure a Promissory Note?

Writing a promissory note is a careful undertaking but is something that you can often do yourself.

It is an essential debt note between a lender and borrower, that makes a sworn promise that the borrower will repay the debt to the note holder.

A promissory note controls important factors such as:

• How much money is owed to a lender
• When owed money must be repaid
• How much interest will be charged
• What happens when the borrower defaults

As a result, it is always important to make sure the right details go down on paper and the right information is covered before anyone signs.

To help get you started, read on below to learn about the key points to remember when writing and structuring your own promissory note or debt invoice template.

Choose the Right Type of Promissory

There are 2 types of promissory notes that can be used by lenders and borrowers.

The first is an unsecured note. These are riskier as they are not tied to any security or collateral. In this case, if the payor defaults, the note holder could end up not being compensated.

This is why many people use secured promissory notes. These require the borrower to name assets or property on the form that can be claimed by the lender if they fail to pay back the principal sum owed when required.

In addition to this, there are many ways to optimize a promissory note, depending on its use. For example, the note can be written and modified to loan money for the following purposes:

• Personal loans
• Financial investments
• Short term credit
• Buying real estate
• Commercial expansion
• Buying a car
• Taking out a student loan

How to Write a Promissory Note

A promissory note doesn’t follow a set standardized structure. There is no exact template design that must be followed in order for it to be enforced.

For this reason, it’s common to see many different design formats being used by different institutions and entities.

The most important thing is that it shows the correct data about the loan sum, repayments, and the people bound by the agreement.

It should also appear sufficiently detailed and trustworthy to give those receiving a signed copy confidence of its validity.

The 8 Key Parts of a Promissory Note

There are 8 key elements that should always appear on a promissory note. These are necessary to ensure the form has enough information to be legally binding and enforceable.

The 8 essential parts of a promissory note include:

1. Names of the lender and borrower
2. How much money is being lent
3. The rate of interest to be applied
4. Collateral used to secure the sum being loaned
5. How and when payments should be made
6. When final payment is due
7. What happens if the borrower defaults
8. Signatures of the lender, borrower, and witnesses

These are all necessary to ensure that the note can be enforced if necessary and to prove that both parties have entered into an agreement of their own free will.

When Are Promissory Notes Used?

Promissory notes can be used in a number of different contexts.

They might be used to secure a loan of a sum of money to a relative or family member.

They can also be used in a business context for short term lending purposes from creditors to companies, or for student loans.

Yet, the most important feature to consider before using a promissory note is that it is time limited. This creates set expectations of when the money must be returned.

Essential Facts About Promissory Notes

There are many critical things you must cover when writing a promissory note.

However, before you start or sign your own it’s essential to remember the following facts:

• A promissory note is a negotiable instrument, this means it can be transferred or sold to another person, who will instead collect the debt from the borrower.
• Promissory notes are governed in the United States Article 3 and 4 of the Uniform Commercial Code (UCC).
• A promissory note is flexible and depending on how it is written can allow borrowers to pay the debt either as a lump sum, in multiple installments, or as due on demand or open-ended basis.
• You don’t have to charge interest when loaning money with a promissory note, although it is recommended as a failsafe in case the payor defaults.
• Banknotes and bond certificates work similarly to promissory notes, as they are both documents that promise the bearer the repayment of a debt.