To write a promissory note, put the loan in writing with the full legal names and addresses of the lender and borrower, the exact principal amount, the interest rate, the repayment schedule, and the state whose law governs the agreement, then have the borrower sign. Add clauses covering late payments, acceleration on default, and prepayment so the document does real work if something goes wrong. The sections below walk through each decision in the order you’ll make it.
Gather the Core Loan Details First
Before drafting, collect the information every note needs. Use the full legal names and current mailing addresses of both sides — no nicknames, no abbreviations. If the borrower ever falls behind, the lender will need those addresses to deliver notices or serve legal papers.
Write the principal — the sum being lent before interest — twice: once as a number and once spelled out in words, such as “$15,000 (Fifteen Thousand Dollars).” Doubling it up prevents anyone from altering the figure later. Record the date the loan is issued, because that date anchors the repayment timeline and starts the interest clock.
Pick the state whose law will govern the note. States treat usury caps, default remedies, and enforcement deadlines differently, and naming the governing state at the outset avoids fights later if the parties live in different places.
Pick a Repayment Structure
The repayment structure controls how and when the borrower returns the money. Three formats cover almost every private loan.
- Installment payments. The borrower pays a fixed amount on a regular schedule — monthly is typical — until the balance is gone. This is the most common structure for personal loans and gives both sides predictability.
- Balloon payment. The borrower makes smaller periodic payments (often interest-only) during the term, then pays the entire remaining balance in one lump sum at maturity. Monthly costs stay low, but the borrower has to produce a large payment at the end.
- Demand note. No fixed schedule. The lender can demand full payment at any time, and the borrower must pay after the demand is made.
Spell out how each payment is applied. A standard order allocates each payment first to accrued fees or costs, then to interest, and finally to principal. Without that order in writing, the parties can disagree about how much principal is actually left after each payment.
Set the Interest Rate Within Legal Limits
Interest can be fixed (unchanged for the life of the loan) or variable (adjusted periodically against a published index like the prime rate). Express whichever you choose as an annual percentage. The rate has both a federal floor and a state ceiling.
Federal Floor: The Applicable Federal Rate
If you lend money at little or no interest, the IRS may treat the loan as “below-market” and charge you tax on interest you never actually collected. Under federal tax law, any loan that carries a rate lower than the Applicable Federal Rate (AFR) triggers “imputed interest,” meaning the IRS treats the lender as if they earned interest at the AFR.1Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans with Below-Market Interest Rates As of January 2026, the AFR is 3.63% for short-term loans (three years or less), 3.81% for mid-term loans (three to nine years), and 4.63% for long-term loans (over nine years).2Internal Revenue Service. Revenue Ruling 2026-2 – Applicable Federal Rates The IRS publishes updated rates monthly, so check the current figure before finalizing your note.
A narrow exception applies to gift loans between individuals: if the total balance between the same two people stays at or below $10,000, imputed interest doesn’t apply, provided the borrower isn’t using the money to buy income-producing assets like stocks or rental property.1Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans with Below-Market Interest Rates
State Ceiling: Usury Laws
Every state caps how much interest a private lender can charge. Statutory limits range from around 5% to over 25% depending on the state, the type of loan, and whether the agreement is written. Charging more than the cap can void the excess interest, expose the lender to damages (sometimes double or triple the interest paid), or render the entire note unenforceable. Look up the ceiling in the governing state before you settle on a rate.
Add the Clauses That Protect You
Once the core terms are settled, assemble the note. A template from a state bar association or a reputable legal provider gives you a structured starting point that covers the basics. Fill every blank, even ones that look optional, so no one can add language after signing.
Beyond the basic terms, a handful of clauses do most of the protective work.
Acceleration
An acceleration clause lets the lender demand the entire unpaid balance immediately if the borrower misses a payment or breaches another term. Without it, the lender can only sue for each missed payment as it comes due. With it, a single default puts the whole balance in play — unpaid principal plus all interest accrued to that point.
Late Fee
A late fee clause imposes a penalty when a payment comes in after a grace period, commonly five to fifteen days past the due date. Fees are usually a flat dollar amount or a small percentage of the overdue payment. Keep it reasonable; courts in many states won’t enforce a penalty they consider excessive.
Prepayment
Decide whether the borrower can pay off early and whether doing so costs extra. A prepayment penalty compensates the lender for interest they lose when the loan retires ahead of schedule, and it’s often calculated as a percentage of the remaining balance or a set number of months of interest. Many personal loans between individuals allow early payoff at no charge. Either way, state your choice explicitly.
Governing Law and Dispute Resolution
Name the state whose law applies and specify where disputes will be resolved, such as the county where the lender lives. Some notes also require mediation or arbitration before either side can file suit.
Decide Whether to Secure the Note
An unsecured note relies entirely on the borrower’s promise. If the borrower stops paying, the lender’s only option is to sue and try to collect on a judgment. A secured note ties the loan to a specific asset — a vehicle, equipment, real estate — that the lender can seize on default.
Three things create a valid security interest: the lender gives value (the loan itself qualifies), the borrower has rights in the collateral, and the borrower signs a security agreement describing the collateral.3Cornell Law School. Uniform Commercial Code 9-203 – Attachment and Enforceability of Security Interest The security agreement can be a standalone document or a section inside the note itself.
To protect your interest against other creditors, you generally need to “perfect” it by filing a UCC-1 financing statement with the appropriate state office, usually the secretary of state. The financing statement lists the borrower’s name, the lender’s name, and a description of the collateral.4Cornell Law School. Uniform Commercial Code 9-502 – Contents of Financing Statement If real estate is the collateral, you record a deed of trust or mortgage with the county recorder instead. Perfection establishes priority: when multiple creditors chase the same borrower, whoever perfected first generally gets paid first.
Make the Note Negotiable If You Might Sell It
A promissory note works as a plain contract, but it gains extra protections if it qualifies as a “negotiable instrument” under Article 3 of the Uniform Commercial Code. A negotiable note can be transferred to a third party, and the new holder may take it free of many defenses the borrower could have raised against the original lender. To qualify, the note must contain an unconditional promise to pay a fixed amount of money, be payable to bearer or to order, be payable on demand or at a definite time, and require nothing of the borrower beyond paying money (with narrow exceptions for protecting collateral).5Cornell Law School. Uniform Commercial Code 3-104 – Negotiable Instrument
If you never plan to transfer the note and just want an enforceable agreement between you and the borrower, it doesn’t have to meet every negotiability requirement. Following them anyway produces a cleaner, more widely recognized document.
Sign, Notarize, and Store
A promissory note becomes binding when the borrower signs. The lender’s signature isn’t always legally required, but having both sides sign reinforces mutual agreement.
Ink or Electronic Signatures
You can sign with pen and ink or a legally recognized electronic signature. Under the federal Electronic Signatures in Global and National Commerce Act, an electronic signature can’t be denied legal effect solely because it’s electronic, as long as both parties agree to conduct the transaction that way.6Office of the Law Revision Counsel. 15 U.S. Code 7001 – General Rule of Validity Some lenders still prefer ink signatures because certain secondary-market buyers require them.
Notarization
Most states don’t require a promissory note to be notarized, but notarization helps. Under the Federal Rules of Evidence, a document with a notary’s certificate of acknowledgment is “self-authenticating,” so it can be introduced in court without calling a witness to verify the signatures.7Cornell Law School. Federal Rules of Evidence Rule 902 – Evidence That Is Self-Authenticating Notary fees are modest, typically under $25 per signature. If the note is secured by real estate, notarization is generally required to record the associated deed of trust or mortgage.
Witnesses
One or two witnesses who observe the signing and sign the document add another layer of evidence if the borrower later claims coercion or forgery. Witnesses aren’t legally required in most situations, but they’re cheap protection.
Storing the Original
Give the original signed note to the lender, who needs it to prove the debt exists and enforce it in court. The borrower keeps a full copy, including all signatures and attachments. Store both in a secure location such as a fireproof safe or safe deposit box.
Report the Interest at Tax Time
Private notes carry tax obligations that are easy to miss. Any interest the lender receives is taxable income and must be reported on the federal return regardless of amount. If interest from a single borrower reaches $10 or more in a calendar year, the lender must file a Form 1099-INT with the IRS and provide a copy to the borrower.8Internal Revenue Service. About Form 1099-INT, Interest Income
If the note charges less than the AFR, the difference between AFR interest and what you actually charged is treated as a gift from lender to borrower. When that difference plus any other gifts to the same person during the year exceeds the annual gift tax exclusion of $19,000, the lender may need to file a gift tax return.9Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 For gift loans between individuals with a balance between $10,000 and $100,000, imputed interest can’t exceed the borrower’s net investment income for the year, and if that investment income stays under $1,000 it’s treated as zero.1Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans with Below-Market Interest Rates
Changing the Note Later
Circumstances shift. A borrower may need a longer term, or both sides may want to adjust the rate. Rather than tearing up the original and starting over, sign a written amendment (sometimes called a modification or addendum). The amendment should identify the original note by date and principal, describe exactly which terms are changing, and state that all other terms stay in effect. Both parties must sign for it to be enforceable, and it belongs in the file with the original note. Verbal changes are hard to prove and often unenforceable, so put every modification in writing.
What Happens If the Borrower Defaults
If payments stop, the note itself is your primary evidence in court. Clear terms, proper signatures, and notarization make the lender’s case straightforward. When the note contains an acceleration clause, the lender can demand the full remaining balance rather than suing over each missed payment separately.
On a secured note, default gives the lender the right to foreclose on or repossess the collateral under the procedures state law requires. On an unsecured note, the lender files suit and, if successful, gets a judgment that can be enforced through wage garnishment, bank levies, or property liens.
Every state limits how long the lender has to sue after a default. Under the version of UCC Section 3-118 adopted in most states, the deadline is six years from the due date for notes payable at a definite time, or six years from the date of demand for demand notes. If neither principal nor interest has been paid on a demand note for ten continuous years and no demand has been made, the right to sue is typically barred. Deadlines vary, so confirm the rule in the governing state before assuming you still have time.