A promissory note is the simplest loan document that actually works: a signed promise from a borrower to repay a stated amount, on stated terms, to a stated person. It is what turns "I lent my brother $15,000" from a story into an enforceable debt.
The note fits personal loans, family loans, small business loans, and seller financing. What makes it enforceable is precision: the amount, the interest, the schedule, and what happens on default, each stated without ambiguity.
Promissory note or loan agreement?
A promissory note is a one-sided instrument: the borrower signs a promise to pay, and that signature alone creates the obligation. A loan agreement is a two-sided contract with mutual covenants: representations, conditions on the advance, collateral terms, and remedies. For a straightforward loan between people or small businesses, the note is usually enough and much easier to execute. Move up to a loan agreement when the loan is secured by collateral, disbursed in stages, or hedged with conditions the borrower must maintain.
| Situation | Better fit |
|---|---|
| Family loan, fixed schedule | Promissory note |
| Friend lends startup cash, single payback date | Promissory note |
| Loan secured by equipment or a vehicle | Loan agreement |
| Staged advances with conditions | Loan agreement |
| Seller financing on a small business sale | Both, note plus agreement |
Interest: usury caps and the IRS floor
Interest on a private loan is squeezed from two directions. State usury laws cap the maximum rate a private lender may charge, with limits and exemptions that vary widely by state. And on the low end, the IRS publishes the Applicable Federal Rate (AFR): family loans above roughly $10,000 that charge less than the AFR can generate imputed interest, meaning the lender may owe tax on interest they never collected, and large forgone interest can count against the annual gift exclusion. A rate at or slightly above the current AFR keeps a family loan clean on both fronts.
Zero percent is allowed, but not invisible
You can make an interest-free loan, and this template supports it. For larger family loans, be aware the IRS may still impute interest at the AFR for tax purposes; a licensed tax professional can tell you whether your amount is affected.
What a signed note is worth when things go wrong
If the borrower stops paying, the note is the evidence that wins the case: amount, terms, and signature, with no argument about whether the money was a gift. The lender sends a demand for the accelerated balance, then sues on the note, in small claims court if the amount fits the state's limit. Notes also start the statute of limitations clock for written contracts, which is longer than for oral promises in most states. Keep the signed original, record every payment received, and put any modification, like a payment holiday, in a signed writing.
Witnesses and notarization
A promissory note is valid with just the borrower's signature. Notarizing it or adding a witness does not change its force but makes the signature nearly impossible to dispute, which is worth doing for larger amounts.
Frequently asked questions
Is a promissory note legally binding?
Yes. A written note stating the amount, the repayment terms, and signed by the borrower is an enforceable contract in every state. Courts enforce them routinely, including between family members, as long as the terms show a real loan rather than a gift.
Does a promissory note need to be notarized or witnessed?
No, the borrower's signature is enough to make it binding. Notarization is optional but recommended for large amounts because it removes any later dispute about who signed.
What interest rate can I charge on a private loan?
Anything from zero up to your state's usury limit, which varies by state and loan type. For family loans, charging at least the IRS Applicable Federal Rate avoids imputed-interest tax issues on larger amounts.
What happens if the borrower does not pay?
The default clause lets the lender accelerate the loan, demand the full balance in writing, and sue on the note, often in small claims court. The signed note is the core evidence; keep the original and a record of all payments.
Can the loan be repaid early?
Under this template, yes: the borrower may prepay at any time without penalty, and prepayments reduce interest going forward. If you want a prepayment penalty instead, that is a term to negotiate and add in writing before signing.