How To Create A Note

Promissory Note Template

A promissory note, or"promise to pay", is a loan contract between a lender that agrees to lend money to a borrower to be repaid with interest. The note holds the borrower accountable for paying back the money under the agreed-upon terms. If the borrower fails to repay the loan, they will be in default and subject to seizure of their assets.

Usury Rate (interest rate laws) – To find the maximum interest rate allowed in your state.

By State

Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming

By Type (2)

Secured Promissory Note – For the borrowing of money with an asset of value "securing" the amount loaned such as a vehicle or a home. If the borrower does not pay back the amount within the time frame suggested the lender will have the right to obtain the property of the borrower.

Download: Adobe PDF, MS Word (.docx), OpenDocument

Unsecured Promissory Note – Does not allow the lender to secure an asset for money loaned. This means that if the payment is not made by the borrower that the lender would have to either file in small claims court or through other legal processes.

Download: Adobe PDF, MS Word (.docx), OpenDocument

Promissory Notes: By State
Promissory Notes: By Type (2)
- Secured
- Unsecured
What is a Promissory Note?
- (Video)
How to Create a Promissory Note (5 steps)
- Step 1 – Agree to Terms
- Step 2 – Run a Credit Report
- Step 3 – Security and Co-Signers
- Step 4 – Writing the Note
- Step 5 – Paying Back the Money
How to Calculate (3 ways)
- - Total Interest Owed
  - Total Repayment Amount
  - Monthly Payment Amount
Usury Laws (Interest Rates %)
Key Terms & Clauses
How to Write a Promissory Note
Related Forms

What is a Promissory Note?

A promissory note is a promise to pay back money owed within a specific timeframe. The borrower receives the funds after the note is signed and agrees to make payments under the terms and conditions of the note. The lender will collect interest which acts as a fee for lending the money.

(Video)

How to Create a Promissory Note (5 steps)

Step 1 – Agree to Terms
Step 2 – Run a Credit Report
Step 3 – Security and Co-Signers
Step 4 – Writing the Note
Step 5 – Paying Back the Money

Step 1 – Agree to Terms

Before both parties sit down to write an agreement, the following should be verbally agreed upon:

Amount ($) – The amount of money being borrowed.
Interest Rate – In other words, the fee for borrowing the money (See How to Calculate). Make sure to check the Interest Rate Laws in your State (or "Usury Rate"). All States have a maximum amount of interest a lender is able to charge.
Late Fee(s) – In the case there will be penalties for late payment.
Security – Items such as vehicles or a 2nd mortgage on a home is provided if the borrowed money is not paid back by the borrower. This is to provide assurance to the lender that their money will be paid-back either in cash or assets.
Terms of Repayment – Will the payments be made incrementally or as a lump sum?
Default Clause – Provide terms in the chance the money is never paid back by the borrower.
Co-Signer – If the borrower is not financially capable of borrowing the money a 2nd person should be named to pay back the loan if the borrower cannot do so themselves.

Step 2 – Run a Credit Report

It is always a good idea to run a credit report on any potential borrower as they may have outstanding debt unbeknownst to you. Especially if the debt is IRS or child support related it will take precedence over this promissory note. Therefore, it is imperative that a credit report is run before making any type of agreement.

Reporting Agencies – It is a good idea to use Experian which is free to the lender and charges $14.95 to the borrower. Experian is known as the most sensitive credit agency usually providing the lowest score of the 3 Credit Bureaus (Experian, Equifax, and TransUnion).

Authorization Form – In order to run someone else's credit, you must obtain written legal permission.

Step 3 – Security and Co-Signer(s)

If there are red flags that appear on the credit report the lender may want to have the borrower add Security or a Co-Signer to the note. Common types of security include motor vehicles, real estate (provided as a 1st or 2nd mortgage), or any type of valuable asset.

This would mean that in the event the borrower did not pay back the funds that the lender would be able to obtain full ownership of the security placed in the note. In the case of a co-signer, he or she would be liable for the full extent of the money owed along with all penalties or late fees.

Step 4 – Writing the Note

After the main terms of the note have been agreed upon the lender and borrower should come together to authorize the formal agreement. For instructions on how to fill in the document, line-by-line refer to the How to Write section.

Signing – The money should exchange hands after it has been signed. It is not required that a witness sign the form but is recommended. For excessive amounts (more than $10,000) a notary public is recommended.

Step 5 – Paying Back the Money

The borrower should pay back the borrowed money on time and in accordance with the note. If not, fees may be applied to the overall balance. Once all the money has been fully paid back to the lender a Loan Release Form is created and issued to the borrower relieving them from any liability from the note.

If Payment is Late – If the payment is late the lender should issue a Demand Letter. This is a form that informs the borrower of the terms stated in the promissory note such as the penalty for late payment as well as how much time they have before they become in default.
If Borrowed Money is Never Paid – If the borrower defaults on the note then the lender can collect by minimizing their costs by seeking the funds through Small Claims Court (Small Claims is usually limited to a value of $10,000 or less, be sure to check the laws in your jurisdiction). If there was security placed in the note then the property or asset shall be turned over to the borrower in accordance with the note. Otherwise, legal action will most likely be necessary for money owed in value of more than $10,000.

How to Calculate (3 ways)

Total Interest Owed
Total Repayment Amount
Monthly Payment Amount

Total Interest Owed

Money Borrowed X Annual Interest Rate = Total Interest Owed

If the payment is monthly or quarterly, then divide the total above by the fraction of the year it will take to repay the loan. Example: Payment due in 3 months would require you to divide the total by 4 since it's only 1/4 of the year.

Example – Let's say I wanted to borrow $1,000 for 3 months at an interest rate of 10%. First, I would want to calculate the interest rate over a year span which would be $100 ($1,000 times 10%). Then, I would divide the $100 amount by 4 (as there are 4, 3-month periods in a year) and I would arrive at $25 as the total interest owed I would need to pay over the course of 3 months for borrowing $1,000. The final payment amount would be $1,025 .

Total Repayment Amount

Money Borrowed + Total Interest Owed = Final Payment Amount

Example – Let's say I wanted to borrow $1,000 for 3 months at an interest rate of 10%. First I would want to calculate the interest rate over a year span which would be $100 ($1,000 times 10%). Then, I would divide the $100 amount by 4 (as there are 4, 3-month periods in a year) and I would arrive at $25 as the total interest owed I would need to pay over the course of 3 months for borrowing $1,000. The final payment amount would be $1,025 .

Monthly Payment Amount

(Money Borrowed + Total Interest Owed) / Number (#) of Months = Monthly Payment Amount

Example – Let's say I wanted to borrow $1,000 for 3 months at an interest rate of 10%. First I would want to calculate the interest rate over a year span which would be $100 ($1,000 times 10%). Then I would divide the $100 amount by 4 (as there are 4, 3-month periods in a year) and I would arrive at $25 as the total interest owed. Then we would add the Money Borrowed of $1,000 to the $25 of interest due which equals $1,025. Since there are 3 months we would divide $1,025 by 3 and the monthly payment amount would equal $341.67.

Usury Laws (Interest Rates %)

Also known as the maximum rate of interest a lender can charge. It's important that Lenders do not charge a rate of interest more than what their state allows. The following are links to each state's Usury Rate Laws.

State	Usury Rate	Laws
Alabama	8% for written contracts, 6% for verbal agreements.	Ala. Code § 8-8-1
Alaska	For loans less than $25,000, 5% above the 12th Federal Reserve District interest rate on the day the loan was made, or 10%, whichever is greater. If the amount is more than $25,000, there is no maximum rate.	Alaska Stat. § 45.45.010
Arizona	No limit for loan agreements in writing. If not in writing, the rate shall be 10% per annum.	Ariz. Rev. Stat. Ann. § 44-1201
Arkansas	Rate of interest may not exceed the maximum of 17% as established in the Arkansas Constitution, Amendment 89.	Ark. Code Ann. § 4-57-104
California	Rate may not exceed 10% per year on loans for personal, family, or household purposes. For other loans for other purposes, the maximum is the higher of 10% or 5% over the amount charged by Fed. Res. Bank of San Francisco at the time loan was made.	Cal. Const. Article XV, § 1
Colorado	For supervised loans general usury limit is 45%, and the maximum for unsupervised loans is 12%.	Colo. Rev. Stat § 5-12-103 and § 5-2-201
Connecticut	The interest rate may not exceed 12%.	Conn. Gen. Stat. § 37-4
Delaware	Not in excess of 5% over the Federal Reserve discount rate at the time the loan was made.	Del. Code. Ann. tit. 6, § 2301
Florida	General usury limit is 18%, 25% on loans over $500,000.	Fla. Stat. § 687.03 and § 687.01
Georgia	The default is 7% if no written contract is established. For written contracts, the maximum 16% on loans below $3,000, 5% per month on loans between $3,000 and $250,000, and no limit on loans above $250,000.	Ga. Code Ann. § 7-4-2 and § 7-4-18
Hawaii	The default is 10% if no written contract is established, 12% is the general usury limit, and 10% is the limit on judgments.	Haw. Rev. Stat § 478-2, § 478-3, and § 478-4
Idaho	Unless stipulated in a written agreement, the legal rate is 12%. The rate of interest on money due on court judgments is 5%.	Idaho Code Ann. § 28-22-104
Illinois	The general usury limit is 9%.	815 Ill. Comp. Stat 205/4
Indiana	8% in the absence of agreement, 25% for consumer loans other than supervised loans.	Ind. Code § 24-4.6-1-102 and § 24-4.5-3-201
Iowa	The maximum interest rate is 5% unless otherwise agreed upon in writing, in which case, maximum is set by Iowa Superintendent of Banking (IA Usury Rates).	Iowa Code § 535.2(3)(a)
Kansas	The legal rate of interest is 10%; the general usury limit is 15%.	Kan. Stat. Ann. § 16-201 and §16-207
Kentucky	The legal rate of interest is 8%, the general usury limit is 4% greater than the Federal Reserve rate or 19%, whichever is less. Any rate may be charged when identified in a contract in writing on a loan greater than $15,000.	Ky. Rev. Stat. Ann. § 360.010
Louisiana	The general usury rate is 12%.	La. Rev. Stat. Ann. § 9:3500
Maine	The legal interest rate is 6% (no usury limit mentioned in statutes).	Maine Rev. Stat., titl. 9-B, § 432
Maryland	The legal interest rate is 6%, a maximum of 8% if a written contract is established.	Md. Code Ann., Com. Law § 12-102 – 103
Massachusetts	The legal interest rate is 6% (unless a written contract exists); even if part of a contract, an interest rate over 20% is criminally usurious.	Mass. Gen. Law Ch. 107, § 3 and Ch. 271, § 49
Michigan	7% maximum if a written contract is established. Otherwise, the legal rate is 5%.	Mich. Comp. Laws § 438.31
Minnesota	The legal rate of interest is 6%. For written contracts, the usury limit is 8%, unless for an amount over $100,000, in which case there is no limit.	Minn. Stat. § 334.01
Mississippi	The legal rate of interest is 8%. Parties may contract for a rate of up to 10% or 5% above the Federal Reserve discount rate, whichever is greater.	Miss. Code Ann. § 75-17-1
Missouri	The maximum interest rate is 10%, unless the market rate is greater at the time.	Mo. Rev. Stat. § 408.030
Montana	15% or 6% above the rate published by the Federal Reserve System, whichever is greater.	Mont. Code Ann. § 31-1-107
Nebraska	The maximum interest rate is 16%.	Neb. Rev. Stat. § 45-101.03
Nevada	Parties may contract for a rate up to the lesser of 36% or the maximum rate permitted under the federal Military Lending Act.	Nev. Rev. Stat. § 99.050
New Hampshire	There is no legal limit on interest rates. It is unclear whether an exorbitant rate could be considered "unfair" under the New Hampshire Consumer Protection Act and hence unlawful.	N.H. Rev. Stat. Ann. § 336:1, § 358-A:2
New Jersey	6% without a written contract, 16% maximum if a written contract is established.	N.J. Stat. Ann. § 31:1-1
New Mexico	15% maximum in the absence of a written contract.	N.M. Stat. Ann. § 56-8-3
New York	The legal rate of interest is 6%, the general usury limit is 11.25%	N.Y. Gen. Oblig. § 5-501 and N.Y. Banking § 14-A
North Carolina	For loans less for less than $25,000, the maximum is the amount announced on the 15th of each month by the North Carolina Commissioner of Banks. For loans greater than $25,000, the parties may agree in writing to any amount.	N.C. Gen. Stat. § 24-1.1
North Dakota	For written contracts for loans less than $35,000, the maximum rate is 5.5% above the current maturity rate of Treasury Bills for the six months preceding the issuing of the loan, or 7%, whichever is greater.	N.D. Cent. Code § 47-14-09
Ohio	The maximum interest for written contracts for loans of amounts less than $100,000 is 8%.	Ohio Rev. Code Ann. § 1343.01
Oklahoma	The parties may agree in a written contract to any rate so long as it does not violate other applicable laws.	Okla. Stat. tit. 15, §266
Oregon	The legal interest rate is 9%, but the parties may agree to different rates in a written agreement. Business and agricultural loans have a maximum of 12 percent or five percent greater than the 90-day discount rate of commercial paper.	Or. Rev. Stat. § 82.010
Pennsylvania	For loans less than $50,000, the maximum rate is 6%.	41 Pa. Cons. Stat. Ann. § 201
Rhode Island	The maximum interest rate is the greater of 21%, or the domestic prime rate as published in the Wall Street Journal plus 9%.	R.I. Gen. Law § 6-26-2
South Carolina	Unsupervised lenders may not charge a rate above 12%. No lender may charge a rate above 18%.	S.C. Code Ann. § 37-3-201
South Dakota	No limit if a written agreement is established, 12% if no agreement exists.	S.D. Codified Laws § 54-3-4 and § 54-3-16(3)
Tennessee	The maximum rate is 10% unless otherwise expressed in a written contract.	Tenn. Code Ann. § 47-14-103
Texas	The parties may agree in writing to a maximum rate up to the weekly ceiling as published in the Texas Credit Letter. If no agreement exists, then the maximum is 10%.	Tex. Fin. Code Ann. § 302.001(b), §303.002
Utah	The maximum rate of interest is 10% unless the parties agree to a different rate in a written contract.	Utah Code Ann. § 15-1-1
Vermont	The rate of interest is 12% except in certain circumstances as provided in subsection (b) of § 41a.	Vt. Stat. Ann. tit. 9, § 41a
Virginia	The legal rate of interest is 6%. With a contract in place, the maximum interest rate is 12%.	Va. Code Ann. § 6.2-301 and § 6.2-303
Washington	The maximum rate of interest is 12% or 4% points above the average bill rate for 26-week treasury bills in the month before the loan was made.	Wash. Rev. Code § 19.52.020
West Virginia	The legal interest rate is 6% but parties may agree to a maximum of 8% in a written agreement.	W. Va. Code § 47-6-5
Wisconsin	The legal rate of interest is 5%. Parties may agree to a different rate in a written agreement, subject to limitations that depend on the identity of the lender.	Wis. Stat. § 138.04
Wyoming	The rate of interest is 7% if no agreement is established in a written contract. Otherwise, parties may agree to a higher rate.	Wyo. Stat. Ann. § 40-14-106

Key Terms & Clauses

Below are common Key Terms (definitions) and Clauses found in our Promissory Note.

Allocation of Payments – Describes how payments shall be made in regards to late fees, interest, and the principle. In our free promissory note, payments shall first pay off any late fees and interest before the principle is credited.

Prepayment – A clause detailing the rules of paying off the loan early, whether it's the entire loan or individual payments. Some loans may require that the borrower pay a fee in order to "prepay" the loan.

Acceleration – In the event a borrower defaults on the note or on a provision within the note and does not cure the default within the allotted time frame, the lender has the option to demand immediate payment of all outstanding dues from the borrower.

Attorney's Fees and Costs – The borrower must pay all monies incurred if defaulting on the loan results in the involvement of attorneys and court proceedings. However, if the borrower ends up prevailing in court, no matter the issue, the lender must then pay for all court-related costs.

Waiver of Presentments – This is a short clause that implies that the lender does not have to demand payment when payments or the loan is due, the borrower holds the responsibility to make certain that the payments are paid when due. If the borrower does not pay when due, the lender must issue a notice of non-payment. Further, if the borrower refuses to pay the note, the lender shall have the notice of non-payment presented and notarized which may follow with legal proceedings.

Non-Waiver – If for any reason the lender fails or delays to exercise their rights under the terms of the note, it does not signify or deem that they are waiving their rights. For example The lender delays in responding to the borrower about an upcoming payment due. The non-response by the lender does not give the borrower the right to not make payment on the due date.

Severability – A clause within a promissory note which states that if any provision within the note becomes void or unenforceable, it does not deem the entire note or any other provision within the note invalid.

Integration – States that no other document can affect the terms or validity of your promissory note. Only can your promissory note be amended (edited) if both the lender and borrower sign a written agreement.

Conflicting Terms – States that no other agreement shall have superior legality or control over your promissory note.

Notice – Describes how notices should be delivered to the borrower. It is standard practice for notices to be written and to be delivered either in person or by certified mail with copies and receipts.

Co-Signer – A person who guarantees the loan if the original borrower defaults on the note. Typically if the lender suspects a borrower to be risky, the lender may require the borrower to obtain another credible person to co-sign on the note.

Execution – States that the borrower is the Principal within the note and severally liable for all dues. If there is a co-signer, both the borrower and the co-signer are equally responsible for paying back the loan.

How to Write a Promissory Note

Compared to other types of contracts and legal forms, a Promissory Note is far easier to understand. Most people, without any sort of legal knowledge, can understand the basics of this document and fill out on their own behalf. Below we show you how to complete our basic promissory note. This example will take place in the state of New York.

Step 1 – Lender & Borrower

Complete the Date by entering the day, month, and year. Proceed by entering the name of the Borrower and Lender. Follow with both of your mailing addresses (can be a personal or company address).

The lender must enter the principal amount of the loan in both words and numbers.

Submit the interest rate (percentage annually). In this example, we entered 16% because in the state of New York, 16% is the maximum allowed interest rate a lender can charge.

Step 2 – Payments

Complete the Date by entering the day, month, and year that the full balance of the loan is due. Include interest and late fees (if any).

You then have two options to select from – Paying back the loan with a Lump Sum or by Installments. Check the box indicating the agreed frequency of repayment and enter the amount. In our example, we chose Monthly Installments. Since the loan is being charged 16% interest, the borrower will have to make payments every month in the amount of $97 dollars.

If you have selected Installments as your repayment option, enter a Late Fee amount in the event the borrower does not make their payments on time. In our example, we opted to make the late fee at a reasonable $25 dollars.

Step 3 – Secure or Unsecure

As a Lender, the safest type of promissory note to use is by selecting "Secure". Most pawn shops use this method. In our example, the borrower has used their iPhone 7 as collateral to secure the loan with the Lender. In the event the borrower can't pay back the loan, the Lender will keep the iPhone 7.

When planning to loan money to an individual or business, select "Unsecure". It's important to have some level of trust in your borrower if you plan to issue an unsecured note.

Step 4 – Co-Signer

Having a Co-signer ensures the loan will be paid back by another person even if the original borrower faults on the loan. You often see co-signers with Unsecured Promissory Notes due to the absence of collateral. In this example, we selected "No-cosigner" since the borrower took out a secured loan by using his iPhone 7 as collateral.

Step 5 – Governing Law

This is fairly an easy step. Simply enter the state that will govern your note (loan). This is particularly important due to the Usury Rates differing by state. The state of the individual or business lending the money (the lender) should be entered. In this example, the lender resides in New York, therefore the state of New York was entered.

Step 6 – Signatures

The lender, borrower, and a witness should all come together when the time comes to sign the note. If there happens to be a co-signer, notify that person to be present as well. Each person must sign, date and print their name in the presence of the witness.

Related Forms (2)

I Owe You (IOU) – A receipt acknowledging a debt that is owed with no timetable for payment.

Download: Adobe PDF

Loan Release Form – When the note has been paid-in-full, the lender should set the borrower free of all liabilities by authorizing a release form.

Download: Adobe PDF, MS Word (.docx), OpenDocument