What Is a Promissory Note?
Promissory notes are written and dated legal documents attached to a debt instrument like loans. It defines the two parties involved, and that is the borrower and the lender. It specifies the features of the loan or amount of money to pay, the terms such as the date when the payment should be made is a must. Both parties involved should sign the document, and either can also make this document of the two parties.
A promissory note can be enforced legally, protect both parties' interests, especially when one party would not meet the signed terms. Through promissory notes, the duties and the rights of both parties are laid out and duly signed.
How to Write a Promissory Note
Ensure and establish a clear record when borrowing or lending money or when availing a loan through the use of promissory notes. It is in promissory notes where all the required and relevant terms are being laid out. With that, here are the guidelines you may consider following when you create your own simple, promissory note.
1. Write the Date and the Amount Borrowed
When it comes to promissory notes, dates are important since all the terms are based on the dates when the promissory note is made and signed by both parties.
Of course, you would also need to indicate the principal sum or the amount of money or the debt the borrower has to pay. Write the quantity in numeric form like how a check should be written. Indicate this clearly to avoid any misunderstandings and confusion.
2. Thoroughly Lay Out the Terms of the Promissory Note
This is the part where you clearly describe how the debt should be paid—be it weekly basis, monthly, or quarterly. Indicate the due date of the first payment, the exact day, month, and year as well as the next due payments after that. Most importantly, indicate the due date of the final payment. Make sure that you show each payment in the amortization schedule, especially the balance with interest rate.
3. List the Interest Rate
Ensure that the interest rate of the debt or the loan is written down, both in numeric and percentage form. In listing the interest rates, make sure that you specify whether it is a fixed rate or adjustable. Having a fixed rate means that the interest rate remains the same throughout the term of the promissory note.
4. Secured or Unsecured?
In creating promissory notes, you need to specify and state whether your promissory note is secured or unsecured. Secured promissory notes are backed by collateral; meaning, the borrower provides the payee the assurance against any risk, especially the risk that the terms of the promissory note will not be fulfilled by the borrower. Unsecured promissory notes are not backed by any collateral; meaning, the lender will simply take the borrower's word that they will truly meet all the terms laid out in the promissory note.
5. Indicate the Promissory Note Holder
Indicate the full name of the noteholder of the promissory note. The noteholders are the individuals or the company or institution that has made the loan and made the promise to pay. Apart from the names, also indicate when the debt will be paid back, the address where the payment should be sent, and the signature and name in print of the borrower and the lender.