What Needs to Be in a Promissory Note?
Promissory notes are documents for one of the simplest types of loans there is -- the simplest would be a handshake or oral agreement. Promissory notes are commonly used in real estate and corporate finance, such as equipment leasing and debt consolidation loans. Though there may be other paper with these loans to explain the legalese, describe the property in detail, describe how the interest rate is calculated, the promissory note is a simple contract that states what is being exchanged, between whom and for what terms. The other documents detail elements of the promissory note; it is the note that is the legally binding portion.
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Parties Involved
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Since a promissory note is a loan of money between two parties, the note needs to identify each party. The "promisor" is the person receiving the money. The "lender" is the person loaning the money. Both parties need to sign the note, and their signatures should be notarized to make the note enforceable.
Terms of the Loan
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The promissory note needs to state how much money is being loaned. Then it needs to list how the money will be paid back and at what interest. You should also include what will happen if the promisor defaults on the loan and what is considered a default.
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Security
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Promissory notes are generally unsecured loans, which means the lender is at the bottom of the list of creditors who are repaid should the promisor go bankrupt. Because of this, notes for larger loan amounts may require collateral. For these notes, make sure the note lists what the loan is secured by. You will probably also need to have a separate security agreement that secures the collateral for the loan.
Usury
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If the transaction creates an interest repayment of the initial loan, it is usury. States have laws governing usury. Depending on the state, the laws can limit the interest, how the rate is calculated and how it can increase or decrease. Make sure your promissory note abides by the usury limits of your state, or you could face criminal charges and the promissory note could be unenforceable.
Governing Law
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Promissory notes are enforced under the laws of the state where the agreement is made. If the lender and promisor are in different states, the lender's state is generally used as the governing state. If the note deals with purchasing assets (i.e., real estate), the laws of the state where the assets are located are generally used as the governing laws.
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