How to Create a Promissory Note

Promissory notes are written debt agreements that detail who owes whom, the amount of the debt, the timing, and the methods for payment. Promissory notes can be, and often are, very simple agreements between parties, though there are certain issues that should be considered before a promissory note is entered.

Difficulty: Moderately Easy

Instructions

1. Enter a transaction requiring debt. Before a promissory note is even necessary, one party must owe another. Frequently, this will be in the course of a sales transaction but this is not an absolute.

2. Determine whether a promissory note is sufficient. A promissory note is a useful instrument for small loan agreements and loans that do not involve real estate. If the transaction is large or involving real estate, one should consider a more sophisticated loan agreement that addresses liens recorded on property deeds, for instance.

3. Identify the parties and the debt. A promissory note must clearly identify who is the promisor and the promisee. Likewise, it must clearly describe the amount of the debt.

4. Agree on terms for repayment. Once the parties and the amount of the debt are determined, the timing and means for repayment should be set. This can include interest charges and late payment fees so long as neither are punitive.

5. Confirm that the interest terms do not constitute usury. Usury is an impermissible high interest charge, most likely through the interest rate charged, but which can also result from unreasonably high fees for other purposes. Usury is not allowed under law. Only reasonable and non-punitive terms can appear in a promissory note.

Tips & Warnings

• Consult an attorney for promissory notes involving large amounts of money.

Resources

• The Promissory Note