Situations arise when you might be asked to lend someone money — more money than you feel comfortable lending without some sort of written agreement of repayment. In this case, you might want to draw up a promissory note to protect your interests. You don't need to hire an attorney to draft a promissory note, although you certainly could. However, you can find plenty examples of a promissory note on the internet.
What Exactly Is a Promissory Note?
In its simplest form, a promissory note is a written acknowledgement and affirmation of a debt owed, and a promise to repay. If you're lending someone money, you can write a promissory note that will help protect you should the other party decide not to repay the loan. There are different classes of promissory notes, such as investment, commercial, real estate and personal promissory notes. It's a common financial instrument you've had to sign yourself if you have ever taken out a loan that you were expected to repay. However, if you're lending money to your cousin to help pay for her wedding costs, you would need to draft a personal promissory note.
Is it Legally Enforceable?
A promissory note is a legally binding instrument as long as it contains certain terms and details. A quick internet search will provide lots of different promissory note templates you can use to help you draft your promissory note, and many are free. A good promissory note template will contain the names and addresses of both the lender (you) and the borrower (the person receiving the loan). It also includes the amount of money borrowed, notation of any collateral you were given to secure the loan, as well as when and how often you expect payments. Lastly, both parties must sign the document to make it legally binding and enforceable. You can have the signatures witnesses or notarized, but this step is not required.
Promissory Note Terms
You should draft your promissory note to be specific for your situation. Even if you use a promissory note template, you can always customize it so it's tailor-made for your needs. For instance, if you are lending someone money, and you expect to be paid by in one lump sum by a certain date, then you do not need to have a payment schedule in the draft. But, you do need to include this term or detail in your promissory note. You also can stipulate that the money is due when you ask for it. This is known as a demand promissory note, however you typically need to give the borrower a reasonable amount of time before you try to collect.