Download a free promissory note template in PDF and Word format below. Whether you’re lending money to family, formalizing a business loan, or documenting a personal debt, this customizable promissory note covers all essentials: loan amount, repayment schedule, interest rate, and default terms. Updated for 2026.
A Concrete Example
A parent lends $40,000 to an adult child to help with a house down payment. Without a promissory note, the IRS may treat the transfer as a gift, triggering gift tax reporting on amounts over the annual exclusion ($18,000 in 2024). With a properly drafted note specifying interest at the Applicable Federal Rate (AFR), monthly payments, and a maturity date, the transaction is a loan — no gift tax, and the parent retains the right to enforce repayment.
The mistake families make is signing a one-page handwritten “IOU” that lacks interest, payment schedule, and acceleration. The IRS reads that as a gift; courts struggle to enforce it. A properly drafted note (the template below) takes 30 minutes to complete, costs $0 in legal fees, and preserves both the tax treatment and the enforceability. For loans over $10,000 between family members, notarize it.
What is a Promissory Note?
A promissory note is a legally binding financial document where one party (the borrower or «maker») promises in writing to pay a specific amount of money to another party (the lender or «payee») under specified terms. It’s essentially an IOU with legal teeth.
Most people who type “promissory note template” into Google don’t actually want a perfect document — they want one that will hold up when it matters, in their state, without forcing them to pay a lawyer hundreds of dollars for what should be a routine paperwork exercise. That is what this page is for. Below you will find a promissory note that incorporates the standard provisions courts expect, in both PDF and editable Word format.
Types of Promissory Notes
Simple Promissory Note
The most basic form. Documents the loan amount, repayment terms, and signatures. Used for small personal loans between individuals.
Secured Promissory Note
Backed by collateral — property, vehicles, or other assets. If the borrower defaults, the lender can claim the collateral. Common for larger loans or real estate.
Unsecured Promissory Note
No collateral. The lender relies entirely on the borrower’s promise to pay. Higher risk, often with higher interest rates.
Demand Promissory Note
Payable whenever the lender demands it, rather than on a fixed schedule. Common in family loans where flexibility is needed.
Installment Promissory Note
Repaid in scheduled installments (monthly, quarterly) until the full balance is paid. Most common for car loans, mortgages, and structured personal loans.
Balloon Promissory Note
Small payments throughout the loan term, with a large final («balloon») payment at the end. Used in commercial real estate and short-term business financing.
When Do You Need a Promissory Note?
- Lending money to family or friends — formalize the loan to prevent disputes
- Personal loans between individuals
- Business loans from investors, partners, or alternative lenders
- Real estate seller financing when the seller acts as lender
- Car loans between private parties
- Student loans in informal lending situations
- Bridge loans for short-term business financing
- Settling debts by documenting payment arrangements
Key Components of a Promissory Note
1. Date and Location
When and where the note is signed. Affects which state’s laws apply.
2. Parties
Borrower (maker) and lender (payee) — full legal names and addresses.
3. Principal Amount
The exact dollar amount being borrowed. Written in both numbers and words to prevent disputes («$10,000 / Ten Thousand Dollars»).
4. Interest Rate
Annual percentage rate (APR). Must comply with state usury laws — typically capped at 10-20% for personal loans. Some states require interest on loans over a certain amount.
5. Repayment Terms
How and when repayment occurs: lump sum, monthly installments, balloon payment. Include exact amounts and due dates.
6. Late Fees and Default
What happens if payments are late or missed. Late fees should be reasonable (typically $25-50 or 5% of payment, whichever is greater).
7. Acceleration Clause
If the borrower defaults, the entire remaining balance becomes immediately due. Protects the lender’s ability to recover the loan quickly.
8. Prepayment Terms
Whether the borrower can pay early without penalty. Most modern notes allow prepayment without penalty.
9. Collateral (if secured)
Description of property or assets backing the loan. Includes specific identifiers (VIN for vehicles, address for real estate).
10. Governing Law
Which state’s law applies. Important for enforcement, especially in cross-state lending.
11. Signatures
Borrower’s signature required. Lender’s signature is recommended but not always required. Notarization adds enforceability.
How to Fill Out a Promissory Note Step-by-Step
- Download the template for your loan type (simple, secured, installment).
- Enter date and location where the note is being signed.
- Identify the parties — full legal names and addresses of borrower and lender.
- State the principal amount — exact dollar value being lent.
- Set the interest rate — annual percentage rate (check state usury caps).
- Define repayment terms — installment schedule, due dates, or lump sum date.
- Specify late fees and default — what happens if payments are missed.
- Add acceleration clause — protect the lender’s right to demand full payment on default.
- Note prepayment terms — usually allowed without penalty.
- Describe collateral — if secured, list specific assets.
- State governing law — which state’s law applies.
- Sign and date — borrower signs (required), lender signs (recommended).
- Notarize — strongly recommended for larger amounts and enforceability.
Interest Rate Limits by State (2026)
Each state limits maximum interest rates (usury laws) on personal loans:
- California: 10% for personal loans (without specific exemptions)
- New York: 16% general; 25% criminal usury cap
- Florida: 18% under $500,000; 25% over $500,000
- Texas: 18% personal loans (varies by loan type)
- Pennsylvania: 6% general; up to 24% for licensed lenders
- Illinois: 9% general; 36% maximum APR for consumer loans
Violating usury laws can void the entire loan. Always check current state limits before setting interest rates.
Common Mistakes to Avoid
- No interest rate specified — IRS may impute interest income to the lender on family loans over $10,000
- Exceeding state usury caps — voids the note and exposes lender to penalties
- Vague repayment terms — «pay when you can» is unenforceable
- Missing late fees clause — no consequence for missed payments
- No collateral description for secured notes — collateral becomes unenforceable
- Not notarizing larger loans — harder to enforce in court
- Using an outdated template — laws change frequently
Download Your Free Promissory Note Template
Choose your preferred format. Both simple and secured versions included.
Frequently Asked Questions
Is a promissory note legally binding?
Yes. When properly executed (signed, with clear terms), a promissory note is enforceable in court. The lender can sue to collect unpaid amounts and, if secured, claim the collateral.
Does a promissory note need to be notarized?
Not legally required in most states, but strongly recommended for loans over $1,000. Notarization adds verification and makes enforcement easier in court.
Can a promissory note be handwritten?
Yes, handwritten notes are legally valid if they include all essential elements: parties, amount, terms, date, and borrower’s signature. A typed template is cleaner and more enforceable.
What interest rate should I charge for a family loan?
To avoid IRS imputed income issues, charge at least the Applicable Federal Rate (AFR) — typically 4-5% in 2026. Below that, the IRS may treat the loan as a gift or impute interest.
What happens if the borrower defaults?
The lender can: (1) demand full payment via the acceleration clause, (2) claim collateral if secured, (3) sue for the unpaid amount in court, (4) report to credit bureaus, or (5) use collections.
How long is a promissory note enforceable?
The statute of limitations varies by state — typically 3-6 years from the date of default. After this period, the note may no longer be enforceable in court.
Can I sell or transfer a promissory note?
Yes. Promissory notes are negotiable instruments and can be sold or transferred to another party. The new holder has the same rights to collect from the borrower.
What’s the difference between a promissory note and a loan agreement?
A promissory note is a simpler document focused on the borrower’s promise to pay. A loan agreement is more detailed, often including representations, warranties, covenants, and default remedies. Use a loan agreement for larger or more complex loans.
Do I need a lawyer for a promissory note?
For small personal loans, a template is usually sufficient. For loans over $10,000, real estate transactions, or complex business arrangements, attorney review is recommended.
Can a promissory note include collateral?
Yes — that’s a «secured promissory note.» Collateral (property, vehicles, investments) backs the loan. If the borrower defaults, the lender can seize the collateral to satisfy the debt.
Related Templates
- Free Loan Agreement Template
- Free IOU Template
- Free Personal Loan Agreement
- Free Bill of Sale Template
- Free Power of Attorney Template
Disclaimer: This template is for informational purposes only and does not constitute legal or financial advice. Usury laws and lending regulations vary by state. Consult a licensed attorney or financial advisor before executing a promissory note for significant amounts.