How To Write A Promissory Note For A Personal Loan

Sometimes referred to as a note payable, a promissory note is a legal document in which one party promises payment to another. As a lender giving a personal loan to a friend or family member, consider drafting a promissory note to lay out the terms for the borrower. As long as you have the right information in the document, you will not need a lawyer for the agreement to be legally binding. We will walk you through how to write a promissory note for a personal loan.

Lay Out Terms of Loan

In the first paragraph of your promissory note, immediately layout the terms of the loan. Include the date that the loan was given as well as the names of all parties involved. Cover the purpose of the loan and the terms for returning the money as well. Additionally, the amount of money that you are lending should appear here. With a strong and clear foundation in setting up the terms of the loan, your promissory note for a personal loan will be on the right track.

Clarify the Payment Plan

After you lay out the terms of the loan in the document, clarify the payment plan. This should include whether the borrower will be repaying the loan as a lump sum or if there will be installments. If you agree to installments, you need to include the date that you expect the first payment along with how much each payment will be. Moreover, include frequency of payments and any penalties for late payments. Whether you choose a lump sum or installments, the promissory note should also include the date of payment-in-full or the final payment. With a clear payment plan, you should have no problem getting your money back.

State Security

Like any other loan you might takeout from a bank, a promissory note for a personal loan should state whether it is an unsecure loan or a secured one in the event of a default. That means you should mention if the borrower is using their own assets as collateral. If the loan is secured by a home or other type of property, this should be indicated in the document along with other relevant information of the asset. However, a promissory note for a personal loan does not need to be secured. Indicate that the loan is unsecured if you wish to lend the capital in good faith. By stating the security in your promissory note for a personal loan, you clarify the consequences of a default.

Address Interest

Moreover, consider including interest on the lent funds in your promissory note. Compare interest rates from other lenders to determine a reasonable rate. If you decide to add an interest rate, you need to clearly state it in the document. The amount of the interest should also appear along side the principle amount and give a clear final number. Keep in mind that you do not need to include interest. If you decide to, though, state whether you expect any interest payments. Many lenders mention the rate of interest on their promissory notes for personal loans in order to collect their repayments more easily.

Get Your Note Signed

For your promissory note for a personal loan to be legally binding, you will need the signature of the borrower at the bottom of the document. Both parties’ names should already appear somewhere on the form. You should also write in the date of signage. The signature acts as legal proof of agreement. It shows that the borrower agreed to all terms of the loan as they are written in the promissory note. If there is more than one borrower, each of their signatures should appear. Without a signature, your promissory note would not be enforceable in court in the event of a default. The most important step in writing a promissory note for a personal loan is the legally binding signature.

When lending a friend or family member money, it is important to write a promissory note for a personal loan to ensure repayment. The terms of the loan and the payment plan should appear clearly. You should include if any collateral has been put up as well as if there is any interest on the loan. If all parties agree to the terms and penalties of the loan, then the borrower will have to sign the promissory note. Now you can safely and legally write as well as collect on promissory notes for personal loans.