Promissory Notes: My Friend Wants To Borrow Money—What Do I Do?
If you decide to loan money to another person, whether it be a family member, friend, or business associate, you should always have a signed document that lists the terms of the agreement. That document is referred to as a promissory note, and it works to protect all parties involved. As the lender, the document is evidence that the sum of money provided was not intended to be a gift. The borrower is protected because the note will have all of the provisions that the parties agreed upon, and the lender can’t make changes without the borrower’s permission. When drafting your own promissory note, it is important to have the following provisions addressed and included:
• Lender and Borrower Information. It is extremely important to include both the lender’s and borrower’s full legal names, addresses, and contact information. Without this information, it could be difficult to legally enforce the document if it becomes necessary to appear in court regarding the matter.
• Principal Amount. The “principal amount” is the original amount of the loan before any interest charges (if any) are applied.
• Payment Terms. Any promissory note should include detailed repayment information in plain English. This includes the total amount of the monthly payments, the day of the month when the payment will become due, and where the payments should be mailed or delivered.
It is also important to clearly describe when a monthly payment will be considered late and what late fees, if any, shall apply. Further, you should state when the first payment will begin and when the payments will end, as well as how many payments will be made overall.
• Default Information. This provision must clearly provide what will happen if the borrower defaults, or fails to make a payment on time. The note should provide the borrower with a certain amount of time to cure the default (usually ten  days), and if the default is not cured, or the amount paid, in that time, adding an acceleration clause to the note will allow the borrower to call the entire amount of the loan due. Some other things to consider in the event of a default are attorney fees and court costs, meaning the lender may want to require the borrower to be responsible for any attorney’s fees or court costs paid in an attempt to recover on the loan.
• Other standard clauses. Some other recommended provisions that are not necessary but may be beneficial to include are:
Choice of law. The choice of law clause says which state’s laws govern the contract, and potentially which court the lawsuit must be filed in, if it’s necessary to go to court. This provision is important to include if the parties involved reside or operate business in different states.
Severability. A severability clause states that if any of the provisions in the agreement are found to be illegal or unenforceable, all of the other provisions shall remain unaffected.
Entire Agreement. This provision provides that the promissory note is the complete agreement between the parties. This means that any oral or written agreements that may have existed before the date that the promissory note is signed are no longer enforceable. This provision also should have a statement that says any modifications or amendments to the agreement are only enforceable if they are in writing and signed by all parties.
The final components of this contract are the signature lines where the borrower, lender, and in many cases, a witness will sign and date the document. Requiring a notarized signature is also recommended, in which case you would need to provide a space for the notary to sign and stamp the document under the signatures.
Attorney Lisa N. Nelson