Texas Laws on Promissory Notes

A promissory note sets the conditions for repayment of a loan, to put the terms in writing. A promissory note will include how much is owed, the interest rate, if applicable, and when payments are due. The borrower, or maker, signs the promissory note, which the lender retains as proof of the transaction. There can be different laws for enforcement, depending on the state where you live. In Texas, there are a few things to remember when creating a binding promissory note.

Uses

Promissory notes might be used in transactions like personal loans between family, mortgages or car financing, especially if two private parties are conducting a deal. One example is an owner-financed mortgage. Small businesses and major corporations also use promissory notes. For example, startup business owners seeking finance for their business will usually be required to sign a promissory note with the lender. In Texas, a promissory note also can be used as a capital contribution to a limited liability company by its members.

Enforceability

In Texas, there are several laws the lender and maker must follow to keep a promissory note enforceable. The promissory note can't include a provision that allows conditional repayment terms, such as the borrower only makes payments when he can afford to. The note must include a clause explicitly stating the borrower promises to pay the agreed-upon amount, and both parties must sign it. The interest rate, if there is one, must be reasonable and comply with Texas Usury Laws. The limit is 18 percent.

Negotiable Instrument

In Texas, a promissory note is a negotiable instrument, meaning the lender can specify a person or business to whom payments should be made, as long as the promissory note includes "pay to the order of" or "promise to pay the bearer of" instructions. For example, a homeowner entering a private mortgage contract with a buyer might assign an escrow company as the bearer of the payments. The lender may also sell or transfer the promissory note to another party, and the borrower is still obliged to abide by the agreement.

Repayment

Texas allows holders of promissory notes to add clauses relating to payment on demand. For example, the clause might go into effect after a missed payment if the holder chooses to enforce it. The lender also can opt to hold a promissory note that doesn't establish a repayment plan, leaving the payment due open-ended and when the lender demands it. Even in that case, Texas requires the promissory note still state the principle and interest due to keep the promissory note enforceable. Texas also forbids lenders adding any nonmonetary tasks or undertakings in addition to repayment. In Texas, promissory notes are only binding for monetary exchanges, not labor in lieu of payment, for example.

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