A promissory note for a personal loan is a formal, written agreement outlining a personal loan’s terms and conditions. It’s a binding contract between the borrower and lender, designed to establish trust and clarity in the lending relationship.
If you get a personal loan from a bank or online lender, the company will generally send you a standard promissory note to sign. But even if you’re considering lending money to a friend, using a promissory note is a wise decision. You’ll just have to write one yourself.
We’ll walk you through what a promissory note should include, how to write one and best practices for creating a document that safeguards your interests.
Written by Joseph Widenhofer ContributorJoseph Widenhofer is a freelance copywriter and editor focusing on economic development, personal finance, schools and boards of developmental disabilities. He primarily works for the Golden Shovel Agency, a full-service virtual agency, as a short- and long-form content writer, as well as a website copywriter tasked with showcasing the positive impact of Economic Development Organizations and how they improve the lives of everyone in their community.
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Edited by Jen Hubley Luckwaldt EditorJen Hubley Luckwaldt is an editor and writer with a focus on personal finance and careers. A small business owner for over a decade, Jen helps publications and brands make financial content accessible to readers. Through her clients, Jen’s writing has been syndicated to CNBC, Insider, Yahoo Finance, and many local newspapers. She is a regular contributor to Career Tool Belt and Career Cloud.
Our Research Process Edited by Jen Hubley Luckwaldt EditorJen Hubley Luckwaldt is an editor and writer with a focus on personal finance and careers. A small business owner for over a decade, Jen helps publications and brands make financial content accessible to readers. Through her clients, Jen’s writing has been syndicated to CNBC, Insider, Yahoo Finance, and many local newspapers. She is a regular contributor to Career Tool Belt and Career Cloud.
Why Trust UsHere’s a breakdown of how we reviewed and rated top personal loan providers
33 Providers RatedOur team researched more than two dozen of the country’s most popular personal lenders, including large online companies like SoFi, big banks like Wells Fargo, and peer-to-peer lenders like Upstart.
660 Data Points AnalyzedTo create our rating system, we analyzed each personal loan company’s disclosures, licensing documents, marketing materials, sample loan agreements and websites to understand their loan offerings and terms.
41 Loan Features TrackedOur team regularly collects data on each company’s loan offerings and terms, such as minimum and maximum loan amounts, origination fees and discounts.
17 Professionals ConsultedBefore we began our research process, we consulted with financial advisors and industry experts to ensure our evaluations covered the banking product aspects that matter most to potential customers.
Related ResourcesAs a legally binding document, a promissory note holds the borrower and lender accountable to the agreed-upon terms. Promissory notes clearly define essential loan details, including:
In the unfortunate event of a loan default or disagreement, a promissory note can be used as evidence in court to enforce the loan terms. This document gives lenders a legal basis to pursue repayment and borrowers a mechanism to defend their rights if necessary.
When you take out a personal loan from a bank or online lender, you’ll sign a promissory note. But they’re also valuable in more informal situations.
To ensure smooth transactions and safeguard your financial interests, you must understand when and why you should use a promissory note. Not having one could lead to misunderstandings and disputes, leaving you legally vulnerable and damaging relationships irrevocably.
When lending money to a friend or family member, relying on trust or an IOU alone is easy. However, even in close relationships, financial disagreements can arise. Using a promissory note establishes clarity and boundaries, reducing the risk of strained relationships due to misunderstandings.
A promissory note is a vital document that formalizes a personal loan agreement, ensuring both borrowers and lenders are on the same page. Creating a well-structured promissory note is essential whether you’re borrowing from a friend, family member or private party.
Once you’ve carefully crafted a promissory note for your personal loan agreement, the next steps are signing it and securely storing it.
Signing a promissory note is a straightforward process that involves both the borrower and the lender. Ensure both parties are present and willing to sign the promissory note simultaneously, either in person or remotely, depending on your preference and your state’s legal requirements.
Before signing, carefully review the entire promissory note with all parties involved. Ensure everyone understands the terms, including the full amount, interest rate (if applicable), repayment schedule and additional clauses. Once both parties are satisfied with the terms, the borrower and lender should sign and date the promissory note in the designated spaces provided. This action formalizes the agreement.
If you sign a physical document, make photocopies or scans of the signed promissory note. Each party should keep a copy in a safe and easily accessible place. If you use electronic signatures, ensure that both parties receive digital copies of the signed promissory note.
Protect your financial interests by storing physical copies securely, such as in a locked filing cabinet or a fireproof safe. Digital copies should be kept on secure, password-protected devices or cloud storage with robust security features. Create backup copies of digital files and store them separately to prevent data loss due to technical issues. Ensure that trusted individuals, such as a spouse or legal representative, know the location and access details of the promissory note copies in case of an emergency.
Modifying a promissory note should involve a mutual agreement between the borrower and the lender. Emphasize that changes cannot be unilaterally imposed by one party. Mutual consent ensures fairness and transparency in the process.
When drafting a promissory note, use clear, concise and easily understandable language. Avoid legal jargon or complex terminology that may lead to confusion or misinterpretation. Clearly define key terms, such as the loan amount, interest rate (if any), repayment schedule and due dates. Leave no room for ambiguity or multiple interpretations.
While it’s possible to draft a promissory note yourself, it’s highly advisable to consult legal professionals, such as an attorney or notary, to ensure the document complies with local laws and regulations.
Promissory notes are legal documents that outline the terms and conditions of personal loans. They serve as written promises from borrowers to lenders. They clarify loan agreements and specify essential details such as the loan amount, interest rates (if any), repayment schedules and due dates. This clarity reduces misunderstandings and disputes.
In personal finance, informed decisions are your greatest asset. As you consider using promissory notes, take the time to understand the loan terms, interest rates and repayment schedules. Knowledge empowers you to make wise financial choices. Consult financial advisors or legal professionals when dealing with significant loans or complex agreements.
Whether notarization is needed can vary by location and specific loan agreements, so it’s advisable to check local regulations and preferences when creating a promissory note.
A handwritten or “informal” promissory note can be legally valid. What matters most is that the document clearly outlines the loan terms, including the loan amount, repayment schedule and the parties involved. While formalizing the note with a typed or professionally drafted document is common for clarity and professionalism, handwritten promissory notes can still hold legal weight if they meet the essential criteria.
Clear terms, signatures and dates state what the borrower receives, and acknowledge that the promissory note is a legal agreement and enforceable if necessary.
A promissory note can be voided or invalidated if the note is based on fraudulent information or contains forged signatures. Also, if either party fails to uphold their end of the agreement or the loan’s purpose is illegal or against public policy, the promissory note may be voided.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
If you have feedback or questions about this article, please email the MarketWatch Guides team at editors@marketwatchguides. com.