Many of us have written and sent an informal IOU to someone to whom we lent money. If you are lending someone a large sum of money, like a personal loan, to family or friends, it is advisable to write a formal promissory note like you’re a lender from the bank.
Writing a formal promissory note does not just benefit you but also the borrower. It gives the borrower a written agreement that lays out the cost of the loan, repayment plans, and other collateral required. This is beneficial because it can come in handy in the future. In this article, we will provide a step-by-step guideline on how to write a promissory note for a personal loan.
What is a Promissory Note?
If, by any chance, you have ever borrowed money from a lender, you may need to sign a promissory note. But before you do that, it is important to be knowledgeable about what this note is all about. A promissory note is an agreement legally bonded together that outlines every detail of a loan. It lays out the repayment plan, loan amount, and a penalty if the borrower fails to pay back the loan.
As a borrower, when you sign a promissory note. It means you agree to all the terms of the loan and you promise to refund the lender. This note is mostly signed when taking a personal loan, or a student loan. Or any other credit from a bank loan or lender. In case the borrower fails to repay the loan, having this note in place helps to solve the problem.
When should I use a Promissory Note?
Every time you lend someone money and you want it to be repaid, you should use a promissory note. Also, when you borrow money from someone and you’re aware they could be upset if you fail to pay back the loan, you should sign a promissory note.
Some people don’t see the need for a promissory note, especially for small amounts of money, but if you intend on lending someone a large sum of money, you need to have a formal promissory note signed to avoid complications.
How to Write a Promissory Note For a Personal Loan
It is not difficult to write a promissory note. Even if you can’t go through the stress of writing word for word. There are websites like LegalZoom and eForms that offer fill-in-the-blank templates you can follow up on to write this note. However, the information below shows a step-by-step guide to writing a promissory note.
- Date
- Names of both the lender and the borrower.
- Amount of the loan.
- whether the loan is secured or not.
- If the loan is secured with collateral.
- What the collateral is.
- When the lender can take possession of the collateral.
- Interest rate.
- Payment plan and amount.
- The due date for repayment.
- If the loan has a cosigner, yes, who?
To determine the repayment amount, including interest, you can utilize an online personal loan calculator, a convenient tool that helps you estimate your loan repayment obligations. All you need is the loan amount, length of term, and interest rate to use the calculator. However, do not forget that every state has laws on the maximum interest rate you can add to a loan. Before issuing a loan, you’ll need to confirm if your loan interest rate is legal.
Signing and Storing a Promissory Note
It’s a good idea to get a lawyer to review your loan to ensure everything is in the right state and that no law is being violated. Getting a lawyer is, however, not necessary for the loan. Once the promissory note is drafted, all parties involved – the lender, borrower, and co-signer (if applicable) – must sign the document, formalizing their agreement and commitment.
Getting professional help in this situation is a good idea, but it’s not compulsory. If, in any case, you need to sue someone, getting a professional review of your promissory note will make sure their signatures aren’t forged. After these processes have been completed, everyone should have a copy of the promissory note, which should be secured in a safe place.
How to make changes to a promissory note
It’s okay to make changes on a promissory note, but before you can do that, you need to first seek permission from everyone involved. Making changes to a promissory note is very easy; all you need to do is write up a second document as a modification to the original document. On the new document, make the changes, and then get everyone to sign again. After that, distribute a copy of the second document to everyone.