How to Write a Promissory Note for a Family Member

To write a promissory note for a family member, put the borrower’s promise to repay in writing, identify both parties, state the principal amount, set an interest rate that meets the IRS Applicable Federal Rate for loans over $10,000, spell out the payment schedule and maturity date, and have the borrower sign. Those pieces make it a real loan in the eyes of a court and the IRS, not a gift dressed up as one.

Why the Paperwork Matters

Skipping the document feels friendlier, but it creates two risks. The first is disagreement: memories differ on how much was borrowed, when repayment starts, and whether interest was ever discussed. The second is tax. The IRS looks at whether a written agreement exists, whether a reasonable interest rate is being charged, whether payments are actually made on schedule, and whether the lender would enforce the terms if payments stopped.¹ If the answer to those questions is no, the IRS can treat the money as a gift, and the lender may owe gift tax on any amount above the $19,000 annual exclusion.² A signed note with real terms is the strongest evidence you have that the transaction is a loan.

What the Note Must Contain

Parties and Principal

Open with the full legal names and current addresses of the lender and the borrower. Then state the principal in numbers and in words, like “$15,000 / Fifteen Thousand Dollars.” Both forms together prevent later arguments over a typo.

Interest Rate

Charging interest on a loan to your brother feels odd, but for loans above $10,000 the IRS effectively requires it. The floor is the Applicable Federal Rate, published monthly and tiered by loan length. For April 2026, the short-term rate (up to three years) is 3.59%, the mid-term rate (three to nine years) is 3.82%, and the long-term rate (over nine years) is 4.62%.³ Because the rates change each month, look up the current AFR the month you sign.⁴

Write the rate as a fixed annual percentage and say how interest accrues. Simple interest is easiest to calculate and typical for a family loan. Check your state’s usury cap too. Every state limits the maximum rate on private loans, and going over that cap can void the interest provision or trigger penalties.

Payment Schedule and Maturity Date

Say exactly how and when repayment happens. There are three common structures:

Installment payments. Regular payments, usually monthly, covering principal and interest until the balance is gone. This is the most practical choice for most family loans because both sides can plan around a predictable rhythm.
Lump sum at maturity. The borrower pays the whole principal plus accrued interest on one future date. Simpler to draft, but the borrower has to set the money aside.
Demand note. The full balance comes due whenever the lender asks. Maximum flexibility for the lender, no predictability for the borrower, and a real chance of tension if the loan is called suddenly.

For installments, list the payment amount, the frequency, and the due dates (or a formula like “the first of each month beginning July 1, 2026”). Include a maturity date, the final deadline by which the whole balance must be paid regardless of the schedule.

Collateral

If an asset backs the loan, describe it precisely enough to identify it: make, model, year, VIN, or serial number. Collateral gives the lender a concrete remedy if payments stop. For smaller family loans it’s usually unnecessary. If the loan is unsecured, say so or leave the section out.

Default, Late Fees, and Acceleration

Define default. It’s typically a missed payment past a certain number of days, and it can also include the borrower filing for bankruptcy or failing to maintain collateral. Then say what happens. The most useful provision is an acceleration clause, which makes the entire remaining balance due immediately once default is triggered. Without one, you’d have to chase each missed installment on its own.

Separately, a late fee for payments that come in past the due date but before a full default is triggered gives the borrower an incentive to pay on time without jumping straight to acceleration. A flat dollar amount or a small percentage of the overdue payment is normal.

Prepayment

Say whether the borrower can pay off the loan early without a penalty. For a family loan, allowing penalty-free prepayment is almost always the right call. One line handles it: “The borrower may prepay this note in whole or in part at any time without penalty.”

Governing Law

Name one state whose laws control the note, usually the state where the lender lives or where the loan was made. States differ on usury caps, default remedies, and enforcement procedure, so picking one avoids later confusion. “This note shall be governed by the laws of the State of [your state]” is enough.

The Interest Rate Rule You Cannot Skip

This is where most family loans quietly go wrong. Federal tax law treats a below-market family loan as if two things happened: the lender gave the borrower a gift equal to the forgone interest, and the borrower paid that interest back, creating taxable interest income for the lender.¹ The lender can end up owing tax on interest they never actually collected.

Two exceptions matter:

Loans of $10,000 or less. The below-market rules don’t apply, as long as the borrower isn’t using the money to buy income-producing assets like stocks or rental property.¹
Loans between $10,001 and $100,000. The imputed interest the lender must report is capped at the borrower’s net investment income for the year. If that net investment income is $1,000 or less, it’s treated as zero, so no imputed interest applies.¹

Above $100,000, there is no cap. The lender owes income tax on the full difference between what the AFR would have produced and what was actually charged. The cleanest fix is to charge at least the AFR and actually collect it. That keeps the IRS out of the picture.

Signing and Storing

A promissory note is the borrower’s promise to pay, so the borrower is the one who has to sign. Under the Uniform Commercial Code, a note is enforceable as a negotiable instrument when it contains an unconditional promise to pay a fixed amount, is payable on demand or at a definite time, and is signed by the maker.⁵ The lender’s signature isn’t legally required, though many families have both sides sign to reflect mutual agreement. Fine practice, as long as you know it’s the borrower’s signature that carries enforceability.

One or two disinterested witnesses add proof that the borrower signed willingly. Notarization goes further: the borrower appears before a notary with valid ID, and the notary confirms identity and voluntary signing. Neither witnesses nor notarization is required in most cases, but both make the note harder to challenge, and notarization usually costs under $20.

After signing, give each party a copy and keep the original somewhere safe, like a fireproof safe or bank safe deposit box. The original is your primary evidence if the loan ends up in court.

Keeping Payment Records

A carefully drafted note loses its value if no one tracks whether it was actually followed. Document every payment with the date, amount, and method. Bank transfers and checks create their own paper trail, which is one more reason to avoid cash. If a payment does come in cash, issue a written receipt and keep a copy.

Keep a running log showing the balance after each payment. It protects the borrower, who can prove what they’ve paid, and it protects the lender, who can show the loan was treated as a real financial obligation. That’s exactly the pattern the IRS looks for when deciding whether something was a loan or a gift. Hold onto these records for at least three years after the loan is fully repaid, which is the standard IRS audit window.

If You Later Decide to Forgive the Loan

Some lenders eventually decide to cancel what’s left. Forgiveness has tax consequences on both sides. Cancelled debt generally counts as gross income to the borrower.⁶ And forgiveness is treated as a gift from the lender, so if the forgiven amount exceeds the $19,000 annual exclusion, the lender needs to file a gift tax return.² Some families forgive a portion each year that stays under the exclusion. That works, but document each year’s forgiveness carefully so the IRS doesn’t decide the whole thing was a gift from the start.

How Long You Have to Enforce It

If the borrower stops paying and you have to sue, every state sets a deadline for filing. Statutes of limitations for written promissory notes run from roughly 3 to 15 years depending on the state. Once that deadline passes, a court won’t enforce the note. Check your state’s limit when you draft, and don’t let a default sit unaddressed for years.

The clock usually starts on the date of the last missed payment or the maturity date, whichever triggers default under your terms. An acceleration clause helps here, because it makes the full balance due at once and gives you a single, clear starting point for the limitations period instead of a rolling series of missed installments.

1
Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
2
Internal Revenue Service. Frequently Asked Questions on Gift Taxes
3
Internal Revenue Service. Revenue Ruling 2026-07 Applicable Federal Rates
4
Internal Revenue Service. Applicable Federal Rates
5
Legal Information Institute. UCC 3-104 – Negotiable Instrument
6
Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness