How to Write a Promissory Note for a Family Member

To write a promissory note for a family member, put the loan in writing with the names of both people, the amount borrowed, an interest rate at least equal to the current IRS Applicable Federal Rate, a clear payment schedule and final due date, what happens if payments are missed, and the borrower’s signature. Done properly, the note keeps the transaction a loan in the eyes of the IRS rather than a taxable gift, and it gives you something a court can enforce if repayment stops.

What the Note Has to Say

Who and How Much

Open with the full legal names and current addresses of the lender and the borrower. State the principal in both digits and words, like “$15,000 (Fifteen Thousand Dollars).” Writing both forms is standard for financial instruments and prevents a dispute over a typo later.

Interest Rate

Family loans above $10,000 need to carry interest, and the floor is the Applicable Federal Rate the IRS publishes each month. AFR varies by loan length: for April 2026, the short-term rate (loans up to three years) is 3.59%, the mid-term rate (three to nine years) is 3.82%, and the long-term rate (over nine years) is 4.62%.¹ Pull the current month’s rate from the IRS website when you draft the note, because the numbers change monthly.²

State the rate as a fixed annual percentage and say how it accrues. Simple interest is the easiest to calculate and the usual choice for a family loan. Also check your state’s usury cap before you settle on a number. Every state limits the maximum interest on private loans, and going over the cap can void the interest provision or trigger penalties.

Payment Schedule and Maturity Date

Spell out how and when the borrower repays. Most family loans use monthly installments of principal and interest running until a set payoff date; a lump-sum payment at maturity or a demand note (due whenever the lender asks) are alternatives, but installments give both sides a predictable rhythm.

For installments, list the payment amount, frequency, and either each due date or a formula like “the first of each month beginning July 1, 2026.” Include the maturity date — the final deadline by which the whole balance is due regardless of the schedule.

Default, Late Fees, and Acceleration

Define default. Usually that’s missing a payment by a set number of days, but it can also include filing for bankruptcy or losing collateral. Then say what follows. The most useful provision is an acceleration clause, which makes the entire remaining balance due immediately on default. Without one, you have to chase each missed payment on its own.

A separate late fee, either a flat amount or a small percentage of the overdue payment, gives the borrower a reason to pay on time without triggering full acceleration.

Collateral, Prepayment, and Governing Law

If an asset like a car secures the loan, identify it clearly (make, model, year, VIN, or serial number). Most family loans are unsecured, in which case you can say so or leave the section out.

Let the borrower pay off early without a penalty. One sentence covers it: “The borrower may prepay this note in whole or in part at any time without penalty.”

Name one state whose law will control the note, usually where the lender lives or where the loan is made. That choice affects usury limits, remedies, and enforcement procedure. “This note shall be governed by the laws of the State of [your state]” is enough.

Meeting the IRS Interest Requirement

This is where family loans most often go wrong. Federal tax law treats a below-market family loan as if two things happened: the lender gave the borrower the forgone interest as a gift, and the borrower paid that interest back to the lender as taxable income.³ The lender can end up owing income tax on interest that never actually landed in their account.

Two exceptions soften this:

Loans of $10,000 or less are outside the rules entirely, as long as the borrower doesn’t use the money to buy income-producing assets like stocks or a rental property.³
Loans between $10,001 and $100,000 cap the imputed interest at the borrower’s net investment income for the year. If that income is $1,000 or less, it’s treated as zero, and there’s no imputed interest to report.³

Above $100,000 there’s no cap. The lender owes tax on the full gap between the AFR-calculated interest and whatever was actually charged. The cleanest fix is to charge at least the AFR and actually collect the payments. That keeps the IRS out of it.

The IRS also looks at whether a written agreement exists, whether payments are made on schedule, and whether the lender would enforce the terms if the borrower stopped paying. If the answer to those looks more like a gift than a loan, the “lender” could owe gift tax on amounts over $19,000 per year.⁴ A well-drafted note is the strongest single piece of evidence that this is a real loan.

Signing the Note

The borrower is the one who has to sign, because the note is their promise to pay. Under the Uniform Commercial Code, a note becomes an enforceable negotiable instrument when it contains an unconditional promise to pay a fixed amount, is payable on demand or at a definite time, and is signed by the maker.⁵ The lender’s signature is not legally required. Many families still have both sides sign to show mutual agreement, which is fine.

Having one or two disinterested witnesses sign adds proof that the borrower signed willingly. Notarization goes a step further: the borrower appears before a notary with valid ID, and the notary confirms identity and voluntary signature. Neither is required in most situations, but both make the note harder to challenge later, and notarization usually costs under $20.

After signing, make copies for both parties and store the original somewhere secure, like a fireproof safe or a safe deposit box. The original is the primary evidence if the loan ends up in court.

Keeping Records So the Note Holds Up

A promissory note is only as good as the payment history behind it. Record every payment with the date, amount, and method. Bank transfers and checks generate their own paper trail, which is one more reason to avoid cash. If cash does change hands, issue a written receipt and keep a copy.

Keep a running log showing the remaining balance after each payment. That log protects the borrower’s proof of what they’ve paid and the lender’s proof that the loan was treated as a real financial obligation, which is the exact evidence the IRS looks for. Hold onto these records for at least three years after the loan is fully repaid, matching the standard IRS audit window.

Deadline to Enforce the Note

Every state imposes a filing deadline for suing on a written promissory note. The window runs from roughly 3 years to 15 years depending on the state. Once it passes, the note still exists as a moral obligation, but a court won’t enforce it. Look up your state’s specific limit when you draft the note, and don’t let a default sit for years without acting.

The clock generally starts from the date of the last missed payment or the maturity date, whichever triggers default under your note’s terms. An acceleration clause helps here: it makes the full balance due at once on default, giving you a single clear starting point instead of a rolling series of missed installments.

If You Later Decide to Forgive the Balance

Some family lenders eventually write off what’s left, and that has tax consequences on both sides. Cancelled debt is generally gross income to the borrower.⁶ Exceptions exist for borrowers who are insolvent or in bankruptcy, but those don’t usually apply to a routine family situation.

Forgiveness also counts as a gift from the lender. If the forgiven amount is above the $19,000 annual gift tax exclusion, the lender needs to file a gift tax return.⁴ Some families forgive a portion each year that stays under the exclusion. That approach works, but document it carefully so the IRS doesn’t decide the whole thing was a gift from the start.

One thing a family lender generally does not have to worry about: filing Form 1099-C for cancelled debt. That obligation applies to banks and other applicable financial entities, not private individuals.⁷ The borrower may still owe tax on the forgiven amount; the reporting piece just works differently for a family lender.

1
Internal Revenue Service. Revenue Ruling 2026-07 Applicable Federal Rates
2
Internal Revenue Service. Applicable Federal Rates
3
Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
4
Internal Revenue Service. Frequently Asked Questions on Gift Taxes
5
Legal Information Institute. UCC 3-104 – Negotiable Instrument
6
Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness
7
Internal Revenue Service. About Form 1099-C, Cancellation of Debt