Promissory Note Template
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Promissory Note Sample
Copy section linkYou can view and edit a sample version of this document directly in Loio’s editor using our Promissory Note Template. This editable sample outlines the key clauses, repayment terms, and structure of a professional note.
What Is a Promissory Note?
Copy section linkA promissory note is a legally binding document in which one party — the borrower — promises in writing to repay a specific amount of money to another party — the lender — under agreed terms.
Think of it as a formal “IOU” that outlines how and when a loan will be repaid, including the loan amount, interest rate, repayment schedule, and what happens if payments are missed.
Promissory notes are commonly used for personal loans between family or friends, business loans, mortgages, or student loans. They create clarity and help prevent misunderstandings by documenting every key term in writing.
Types of Promissory Notes
Copy section linkSecured Promissory Note
A secured promissory note includes collateral — an asset pledged by the borrower (such as a car, property, or equipment). If the borrower fails to repay the loan, the lender can claim the collateral to recover the debt.
Example:
Alex borrows $10,000 from Jordan to buy a car. The car serves as collateral, so if Alex doesn’t repay, Jordan can repossess the vehicle.
Unsecured Promissory Note
An unsecured promissory note is based on trust alone — no collateral is provided. Because of the higher risk to the lender, the interest rate may be higher or the repayment terms stricter.
Example:
A parent lends $2,000 to their child for college books. The loan is based on good faith, without any assets securing it.
Master Promissory Note (MPN)
This note is mainly used for federal student loans. It allows multiple loans from the same lender under one agreement, avoiding the need to sign a new note each time.
Demand Promissory Note
With this note, the lender can request full repayment at any time. It’s flexible but riskier for the borrower since there’s no fixed end date.
Convertible Promissory Note
Often used in startup financing, this note gives the lender the option to convert the loan into company equity instead of being repaid in cash.
Installment Promissory Note
Here, the borrower repays the loan in smaller, regular installments, often ending with a larger final “balloon” payment.
Joint and Several Promissory Note
Used when multiple borrowers share the loan. Each borrower is both individually and jointly responsible for repayment.
When to Use a Promissory Note
Copy section link- Personal Loans: When lending or borrowing between family or friends, to ensure fairness and avoid disputes.
- Mortgages or Real Estate: Used as the main loan agreement promising repayment for property purchases.
- Seller or Owner Financing: When a property seller acts as the lender and sets repayment terms for the buyer.
- Business Startup Loans: When an investor or partner provides funding to a new business.
- Student Loans: A binding agreement between the borrower (student) and lender (school or government).
- Unsecured Business Loans: Short-term loans without collateral, often between companies or investors.
The Parties in a Promissory Note
Copy section linkMaker (Borrower or Payer)
The person or business borrowing the money and agreeing to repay it.
Payee (Lender)
The individual or organization lending the funds and expecting repayment under the agreed terms.
Clauses You Can Include in a Promissory Note
Copy section linkA well-written promissory note template should include the following sections:
- Principal Sum: The total loan amount being borrowed.
- Interest Rate: The agreed percentage charged on the principal.
- Payment Schedule: How and when payments will be made — monthly, quarterly, or in installments.
- Maturity Date: The final repayment date for the full amount.
- Default Clause: Defines what counts as a default (missed payment, noncompliance) and its consequences.
- Acceleration Clause: States that if a default occurs, the lender can demand full repayment immediately.
- Late Fees/Penalties: Lists any fees or higher interest charged for overdue payments.
- Governing Law: Identifies which state’s laws apply to the note.
- Signatures and Dates: Both the borrower and lender must sign and date the agreement.
How to Write a Promissory Note
Copy section linkStep 1. Identify the Parties
List the borrower (maker) and lender (payee) with their full names and contact details.
Step 2. Specify the Loan Amount and Terms
Write the exact amount of money being borrowed and the purpose of the loan, if applicable.
Step 3. Set the Interest Rate
Include the agreed interest rate — fixed or variable — according to state laws.
Step 4. Outline the Repayment Schedule
Describe how payments will be made:
- Lump sum or installments;
- Payment frequency (monthly, quarterly);
- Start and end dates.
Step 5. Add Default and Penalty Clauses
Explain what happens if the borrower misses payments or defaults — including any late fees or acceleration clauses.
Step 6. Include the Governing Law
State which jurisdiction’s laws will govern the loan terms and enforcement.
Step 7. Sign and Date
Notarization isn’t always required but adds an extra layer of protection.
How to Calculate the Interest Rate in a Promissory Note
Interest rates are typically expressed as an annual percentage of the loan amount.
Here are three common methods to calculate it:
1. Simple Interest:
Interest = Principal × Rate × Time
Example: A $10,000 loan at 5% for one year = $500 in interest.
2. Compound Interest:
Interest is added periodically (monthly or yearly), and future interest is calculated on the new balance.
3. Flat Rate Interest:
The total interest is fixed for the loan duration and doesn’t change over time.
Each U.S. state limits the maximum interest rate (usury rate). Always check your state’s rules before finalizing the note.
Frequently Asked Questions
Copy section linkWho keeps the original promissory note?
The lender usually holds the original note until the debt is fully repaid. Once paid off, it’s marked “Paid in Full” and returned to the borrower.
Are promissory notes legally binding?
Yes — as long as the document includes the loan amount, repayment terms, and signatures of both parties, it’s enforceable in court.
Is a handwritten promissory note legal?
Yes, handwritten notes are valid if signed by both parties — but digital or typed notes are preferred for accuracy and readability.
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