How To Easily Write A Promissory Note For A Personal Loan To Family Or Friends (2024)

Most of us have written an informal IOU before when we lend money to someone.

But if you’re lending a large amount of money, such as a personal loan to family or friends, it’s a good idea to write up a formal promissory note just as if you were a lender from a bank. Writing a formal promissory note also benefits the borrower, too. It gives them a written agreement that outlines the loan costs, repayment obligations and any required collateral.

Here’s what you need to know to write a promissory note for a personal loan.

Related:Compare Personal Loan Rates

What Is a Promissory Note?

If you’ve ever borrowed money from a lender, chances are you signed a promissory note.

A promissory note is a legally binding agreement that lays out all the details of the loan. It’s a contract that includes the loan amount, repayment obligations, loan costs and what the lender can do in case the borrower doesn’t pay back the loan. When you sign a promissory note as a borrower, you agree to the terms of the loan and promise that you’ll pay it back.

We’re most familiar with using promissory notes when we take out a personal loan, a student loan or some other sort of credit from a bank or lender. But sometimes we lend money to friends and family, too. Often, we simply lend them money with an unofficial or even verbal IOU.

But that can easily backfire. What if your nephew skips town with your $5,000, for example? Or what if your aunt is taking her sweet time in paying you back when you could really use the money now? Having a formal promissory note in place can help solve problems like this.

When Should You Use a Promissory Note?

You should use a promissory note every time you lend someone money that you’d like to be repaid back. On the flip side, it’s also a good idea to sign a promissory note anytime you borrow money from someone where they could be upset if you didn’t pay it back.

Most people don’t bother signing promissory notes for small amounts, like spotting someone at dinner or filling up a tank of gas. But if you’re going to lend someone a few hundred or thousand dollars, for example, you’ll want to make sure you have a formal promissory note written up so everyone is on the same page.

How to Write a Promissory Note

Although it’s a legal document, writing a promissory note doesn’t have to be difficult. There are even websites online that offer fill-in-the-blank templates, like eForms or LegalZoom.

At its most basic, a promissory note should include the following things:

• Date
• Name of the lender and borrower
• Loan amount
• Whether the loan is secured or unsecured
  • If it’s secured with collateral:
    • What is the collateral?
    • When can the lender take possession of the collateral (for example, after three months of missed payments? One year?)
      Interest rate
• Payment amount and frequency
• Payment due date
• Whether the loan has a cosigner, and if so, who

If you’re charging interest on the loan, you can easily calculate the payment amount using an online personal loan calculator. All you’ll need to enter is the loan amount, the term length (i.e., how long the borrower will take to pay it off) and the interest rate.

Keep in mind that each state has its own laws about the maximum interest rate you can charge on a loan. These are known as usury laws, and you’ll need to check them to make sure your loan interest rate is legal if you’ll be charging interest.

Signing and Storing a Promissory Note

It’s often a good idea to have a lawyer check over your loan to make sure everything is in good shape and you’re not inadvertently violating any laws. However, using a lawyer is not necessary for the loan to be valid.

Once you draft the promissory note, it’s time for everyone to sign it: the lender, the borrower and the co-signer (if there is one). Again, seeking professional help such as notarizing the signatures is a good idea but not required. If you should head to court to sue someone, it’ll make sure that the other side can’t claim you forged their signature.

Make sure everyone who signed the promissory note gets a copy for their records. It’s a good idea to make a separate copy and keep it in a safe place too, such as in a locked filing cabinet and/or on your computer’s hard drive.

How to Make Changes to a Promissory Note

It’s okay if you need to make changes to your promissory note, but to do so, you’ll need to get everyone’s permission first.

To adjust the contract, it’s usually easiest to simply write up a second document as an amendment to the original document. Write down the changes, whether it’s the interest rate, the payment amount or something else. Then, have everyone sign that copy again, and give everyone a copy of the amendment. That way, it’ll still hold up in court if it’s ever needed.