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Promissory note

A loan IOU with teeth. Names the lender, borrower, amount, interest, payment schedule, and consequences if the borrower defaults. Standardized; minor state quirks on usury caps.

1 documentsAbout 8 minutes11 questions to answer
What's in the pack
Promissory Note
Note, 1 page
01
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A handshake loan is a gift waiting to be misremembered. A promissory note is the same loan, written down, with terms — and a remedy if the borrower disappears.

Who this pack is for

You're lending money to someone — a family member, a friend, a small-business owner, a tenant — and you want a written record that creates real legal obligations. The amount is meaningful enough to matter ($1,000+ for most people), the relationship is good but the stakes are real, and you want clear terms on interest, payment schedule, late fees, and what happens if the borrower defaults. Or you're the borrower, asking for a loan from someone who wants paperwork before writing the check.

When to use it

Sign the promissory note before money changes hands. The note records a debt; without one, you have a verbal contract that's hard to enforce in court (the statute of frauds may even render it unenforceable in some states for amounts over a threshold, depending on the loan terms). Common scenarios: parent loaning a child a down payment, friends investing in each other's small businesses, partners in a closing-the-business equity buyout, a private deal where bank financing isn't available. For loans over $10,000, also consider IRS imputed-interest rules — loans below the Applicable Federal Rate (AFR) can trigger imputed interest income for the lender. Set the interest rate at or above AFR to avoid this, even if it's a friendly loan.

What it doesn't cover

This is a basic unsecured promissory note. It does not include a security interest — if the borrower defaults, you have a claim against them but no collateral to repossess. For loans secured by collateral (a car, equipment, real estate), you need a separate security agreement (UCC Article 9 for personal property, mortgage / deed of trust for real estate) recorded with the appropriate state filing office. It does not handle real-estate financing — those have additional disclosure requirements under the Truth in Lending Act for owner-occupied purchases. It does not include guarantor language — for a third party to be liable if the borrower defaults, that's a separate guaranty agreement. And it does not address consumer credit regulations (TILA, Regulation Z) that apply to commercial lenders making consumer loans; those are for licensed lenders, not private parties.

State-specific notes

Rules vary by jurisdiction. Below are notes for the states where promissory note runs into the most variance. If your state isn't listed, default to your state's tenant-rights handbook or local legal aid.

California (CA)
California's usury cap (Cal. Const. Art. XV § 1) is 10% per year for non-business consumer loans, 5% over Federal Reserve discount rate (typically lower than 10%) for business loans. Exceptions exist for licensed lenders. A note above the cap is unenforceable for the excess interest; the principal remains collectible.
New York (NY)
New York has one of the strictest usury laws (N.Y. Gen. Oblig. Law § 5-501; N.Y. Penal Law § 190.40). 16% civil cap, 25% criminal threshold. A note above 25% is void as to both principal and interest — the lender loses everything, including the principal. Be very careful with NY loans; default to 6–10% to be safely under both thresholds.
Texas (TX)
Texas usury (Tex. Fin. Code § 302) is 10% for non-commercial loans, but commercial loans above $250,000 have higher tolerances and licensed lenders have separate caps. Penalties for usury are severe (forfeiture of interest plus statutory damages); err on the side of lower rates for non-business loans.
Florida (FL)
Florida (Fla. Stat. § 687) caps non-business loans at 18%, with a criminal threshold at 25%. Above the criminal threshold, the entire loan is unenforceable. Loans over $500,000 have higher tolerances.

Common questions

What's a usury cap and why does it matter?
Usury caps are state-imposed maximum interest rates for private (non-licensed-lender) loans. Above the cap, interest is unenforceable in court — and in some states (NY most notably), the entire loan including principal becomes unenforceable. Caps vary widely (CA 10%, NY 16% civil / 25% criminal, TX 10%, FL 18%). Default to 6–8% for friendly loans; for higher rates, verify you're under the cap or use a licensed lender.
What happens if the borrower doesn't pay?
The note's default and remedy clauses kick in. After the cure period (typically 30 days), the lender can declare the entire balance due and sue for collection in small claims (for amounts under the state limit) or civil court. Judgment lets the lender garnish wages (in states that allow it for consumer debt), levy bank accounts, and place liens on real property. Collection takes time and isn't free — for amounts under $5,000–$10,000, plan for self-collection in small claims; for larger amounts, an attorney on contingency makes sense.
Should I add a personal guarantee or co-signer?
If the borrower is an LLC or corporation, yes — a personal guarantee from the owner makes them individually liable if the entity defaults. Without it, you can collect only against the entity's assets. For loans to individuals, co-signers serve a similar function but are unusual outside of student/auto financing. Pike's pack doesn't include a guarantor — for that, draft a separate guaranty agreement and reference it in the note.
What's an Applicable Federal Rate (AFR)?
AFR is the IRS-published minimum interest rate for loans above $10,000 to avoid imputed-interest treatment. If you lend at below AFR, the IRS treats the difference as interest you 'should have' charged — taxable to the lender as interest income, taxable to the borrower as a gift (subject to gift tax rules). AFRs are published monthly at irs.gov/applicable-federal-rates and are typically much lower than market rates. Set your note's interest rate at or above the published short-term, mid-term, or long-term AFR (depending on loan length) to avoid imputed-interest issues.
Should the note be notarized?
Notarization is not required for the note's validity but adds enforceability — a notarized signature is much harder for the borrower to deny later. For loans above $5,000 between non-family parties, notarize. For family loans where the relationship reduces the dispute risk, notarization is optional. Most banks, UPS Stores, and AAA offices notarize for $5–$15.
What about interest-free loans?
Legal — but the IRS imputes interest at AFR for loans over $10,000, treating the foregone interest as a gift from lender to borrower. For loans up to $10,000 (or in some cases up to $100,000 with limited exceptions), imputed interest doesn't apply. Family loans of small amounts to help with hardship typically don't trigger anything — but for loans of significant size, even between family, set a rate at AFR to avoid IRS questions.
Can I record the note with the county or state?
An unsecured promissory note is generally not recorded — it's a private contract between two parties. If the loan is secured by real property (a mortgage or deed of trust), the security instrument is recorded with the county recorder's office. If secured by personal property, a UCC-1 financing statement is filed with the state Secretary of State. The note itself stays in your files.

Sources

Primary legal sources cited above. These link to free, public versions of the statutes, regulations, and case law referenced in this pack.

Pike provides plain-language legal information, not legal advice. State and local rules change. If money, custody, or your housing is on the line, talk to a licensed attorney or your local legal aid office.