To write a promissory note, put in writing the names of the borrower and lender, the exact loan amount, the interest rate, the repayment schedule, what happens on default, and the borrower’s signature — then make sure the interest rate stays under your state’s usury cap and that the note meets the Uniform Commercial Code’s requirements for a negotiable instrument. Getting those pieces right is what separates a document a judge will enforce from one a borrower can pick apart.
What the Law Requires
Every state has adopted some version of the Uniform Commercial Code, and Article 3 governs promissory notes. Under UCC § 3-104, a note qualifies as a negotiable instrument only if it contains all of the following:1Legal Information Institute. UCC 3-104 – Negotiable Instrument
- An unconditional promise to pay a fixed amount of money. Interest and other charges are fine, but payment cannot depend on some outside event.
- A named payee, or language making the note payable to whoever holds it.
- Payment on demand or at a definite time.
- No extra obligations beyond paying money. Collateral provisions and a governing-law clause are allowed; a requirement that the borrower perform services is not.
A note that misses one of these tests can still work as an ordinary contract, but it loses the protections that come with negotiable instruments. That matters if the note is ever assigned to someone else or ends up in court.
Decide What Kind of Note You Are Writing
Two choices shape everything else in the document.
The first is whether the note is secured or unsecured. A secured note is backed by specific collateral, such as a vehicle or real estate, and the lender can claim that property if the borrower defaults. An unsecured note relies only on the borrower’s promise, which is why unsecured notes tend to carry higher rates or tighter terms.
The second is whether the note is a term note or a demand note. A term note has a fixed maturity date; the lender cannot ask for early repayment unless the borrower defaults. A demand note has no end date, and the lender can call the loan whenever they choose, as long as they give whatever notice the note requires.2Legal Information Institute. Demand Note
The Terms You Have to Write Down
A promissory note does not need to be long. It does need to cover certain ground with no ambiguity.
Parties and Amount
Use the full legal names and addresses of both people. The borrower is the maker; the lender is the payee. Write the loan amount in numbers and in words so a smudged digit cannot become a dispute.3Investopedia. Understanding Promissory Notes: Types, Benefits, and Risks
Interest Rate and How It Is Calculated
State the annual rate. Then state whether interest is simple or compound, and how often it accrues. A note that just says “5% interest” leaves both of those questions open, and that is enough to fight about later.
Every state caps the interest rate a private lender can charge. Caps range from roughly 5% to 25% depending on the state and the type of loan. Charging more is usury, and the penalties are steep: a court may void all interest on the loan, cut the rate down to the legal maximum, or in some states impose additional penalties on the lender. If the two parties live in different states, check both states’ usury laws before settling on a number.
Payment Schedule and Maturity Date
Spell out how repayment will actually work. Common structures include a single lump sum on a set date, equal monthly installments, or interest-only payments with a balloon payment at the end. Give the day of the month payments are due, the payment amount, and the final maturity date when any remaining balance comes due.3Investopedia. Understanding Promissory Notes: Types, Benefits, and Risks
Default and Acceleration
Define what counts as a default. A missed payment is the standard trigger, but you can add events like the borrower filing for bankruptcy or letting insurance on the collateral lapse. Then state the consequences: late fees, a default interest rate, and, most importantly, an acceleration clause.4Legal Information Institute. Acceleration Clause
An acceleration clause is what gives the lender real leverage. Without one, a lender suing over missed payments can only recover the payments that are already overdue. With one, a single default lets the lender demand the entire remaining balance at once. One catch: if the borrower cures the default before the lender formally invokes the clause, the lender may lose the right to accelerate.4Legal Information Institute. Acceleration Clause
Collateral
For a secured note, describe the collateral precisely. A vehicle needs year, make, model, and VIN. Real estate needs the full property address and the legal description from the deed. “My car” or “the house” is not enough.
Governing Law
Say which state’s law controls the note. This matters most when the parties live in different states. Use the word “governed” rather than “interpreted” or “construed” — some courts read those narrower words as covering only contract interpretation and not other issues like available defenses or damages.
The Optional Clauses Worth Adding
Depending on the deal, consider a prepayment clause (whether the borrower can pay early without penalty), an attorney’s-fees clause (which side pays legal costs if the note ends up in court), and a severability clause (so the rest of the note survives if a court strikes down one provision). None of these are required, but each closes a gap that gets expensive to litigate.
Do Not Skip the Tax Rules
Private loans between family members or friends are where most people get surprised. The IRS pays attention even when the two parties do not.
The Applicable Federal Rate
If you lend money at less interest than the IRS’s Applicable Federal Rate, the IRS treats the shortfall as “foregone interest.” That foregone interest counts as taxable income to you, the lender, even though you never received it. For loans between family members, the same shortfall is also treated as a gift from lender to borrower.5Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
The AFR changes monthly and varies by loan term. For early 2026, the annual rates are roughly 3.5% to 3.6% for short-term loans (three years or less), 3.8% to 3.9% for mid-term loans (over three but not more than nine years), and 4.6% to 4.7% for long-term loans (over nine years).6Internal Revenue Service. Rev. Rul. 2026-3 Applicable Federal Rates for February 2026 Look up the current AFR for the month you make the loan.
The $10,000 Exception
If the total you have loaned to one person is $10,000 or less, the imputed interest rules generally do not apply. The exception disappears if the borrower uses the money to buy income-producing assets like stocks or a rental property.5Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
Reporting Interest You Actually Receive
A lender who receives $10 or more in interest during a year from a private loan should report it on their tax return. For more formal loans, you may also need to file Form 1099-INT.7Internal Revenue Service. About Form 1099-INT, Interest Income
Signing It
Only the borrower is legally required to sign a promissory note.8Legal Information Institute. Promissory Note The note is the borrower’s promise to pay, and the borrower’s signature is what makes it binding. Lenders often sign too, to acknowledge receipt or confirm certain terms. That is fine, but not required.
A witness adds protection, especially on larger loans, because the witness can later testify that the borrower signed voluntarily. Notarization goes further: the notary verifies identity and attests to the signature. No state requires notarization for a basic promissory note to be enforceable, though some do require it for notes secured by real estate. Even when optional, notarization strengthens the document if it ever reaches a courtroom.
Before anyone signs, both parties should read the whole document. Disputes routinely trace back to one party claiming they did not understand a term. Ten minutes walking through each provision together can prevent months of argument later.
After the Note Is Signed
Store the original in a fireproof safe or a safe deposit box. The original is a negotiable instrument, and physical possession of it usually matters for enforcement. Give each party a copy for reference, and keep the original in one place.
Keep a running payment log with the date, amount, and split between principal and interest. Both parties should keep their own records. If payments are in cash, get a signed receipt every time.
When the loan is paid off, the lender should mark the original note “Paid in Full,” date and sign it, and return it to the borrower. For secured notes, the lender also releases the lien on the collateral. Do not skip this step. A borrower who has paid but cannot prove it, because the lender still holds an unmarked original, is in a bad spot.
Mistakes That Sink Promissory Notes
- No borrower signature. Nothing else in the document matters if the maker did not sign, and this is the one gap that cannot be fixed after the fact.
- Vague terms. “To be repaid when possible” or “at a reasonable rate” gives the borrower room to argue the terms were never settled. Courts do not fill in blanks.
- Interest above the usury cap. The lender may forfeit all interest, and some states add penalties on top. Not knowing the cap is not a defense.
- Losing the original. Without it, proving you are the rightful holder of the debt gets much harder.
- Unauthorized changes. Any modification after signing must be agreed to and initialed by both parties. A lender who edits the note unilaterally risks having the whole thing thrown out.
You do not need a lawyer to write a valid promissory note. For loans above a few thousand dollars, or any loan secured by real estate, paying an attorney to review the draft before signing is cheap insurance.