A promissory note is a written promise from a borrower to repay a specific sum to a lender, and to write one that will actually hold up you need seven things on the page: the full names of both parties, the exact loan amount, the interest rate, the repayment schedule, what counts as default, any collateral, and the borrower’s signature. Everything else in a well-drafted note is there to close gaps around those seven items. The rest of this guide walks through how to write a promissory note that a court would enforce, what the IRS expects you to do about interest, and the drafting mistakes that quietly make notes worthless.
What a Valid Promissory Note Must Contain
Every state has adopted some version of the Uniform Commercial Code, and Article 3 governs promissory notes. Under UCC § 3-104, a note qualifies as a negotiable instrument only if it meets four tests, and those tests are a useful drafting checklist even if you never plan to transfer the note to anyone else.1Legal Information Institute. UCC 3-104 – Negotiable Instrument
- The note must contain an unconditional promise to pay a fixed amount of money. Interest and other charges are fine; making payment contingent on some outside event is not.
- The note must be payable to a specific person or to bearer.
- The note must be payable on demand or at a definite time.
- The note cannot require the borrower to do anything else, like perform services, as a condition of the promise. Collateral provisions and a governing-law clause are allowed.
If your note fails one of these tests it may still work as an ordinary contract between the two parties, but it loses the extra protections that come with a negotiable instrument. For most private loans, writing to meet the UCC standard costs nothing extra and preserves your options.
Choose the Structure Before You Draft
Two choices shape every other term in the note.
A secured note is backed by collateral — a vehicle, real estate, equipment — that the lender can claim if the borrower defaults. An unsecured note rests on the borrower’s promise alone, which is why unsecured notes usually carry higher interest or tighter repayment terms.
A term note has a fixed maturity date; the lender cannot demand early payment unless the borrower defaults. A demand note has no fixed end date, and the lender can call the balance in at any time on reasonable notice.2Legal Information Institute. Demand Note Decide which combination fits the loan before you start writing, because the payment schedule and default sections look different for each.
The Terms to Write Into the Note
Parties and Loan Amount
Start with the full legal names and addresses of both parties. In promissory-note language the borrower is the “maker” and the lender is the “payee.” State the exact dollar amount in both numbers and words so a smudged digit cannot become a dispute.3Investopedia. Understanding Promissory Notes: Types, Benefits, and Risks
Interest Rate and How It Is Calculated
If the loan carries interest, write the annual rate and the method of accrual. Say whether it is simple or compound and how often it is calculated. A note that reads only “5% interest” is practically asking for a fight over whether that is simple or compound, annual or monthly.
Every state caps what private lenders can charge, roughly 5% to 25% depending on the state and the type of loan. Going over that cap is usury, and the penalties bite: a court may void the interest obligation entirely, reduce the rate to the legal maximum, or in some states add further penalties. When the parties live in different states, check both states’ usury rules before setting a number.
Payment Schedule and Maturity Date
Spell out how and when repayment happens. Common structures are a single lump sum on a set date, equal monthly installments, or interest-only payments with a balloon payment at the end. Include the day of the month payments are due, the payment amount, and the final maturity date on which any remaining balance is due.3Investopedia. Understanding Promissory Notes: Types, Benefits, and Risks
Default and Acceleration
Define what counts as a default. A missed payment is the standard trigger; you can also include events like the borrower filing for bankruptcy or letting insurance on collateral lapse. Then state the consequences: late fees, a higher default interest rate, and an acceleration clause that makes the full remaining balance immediately due.4Legal Information Institute. Acceleration Clause
The acceleration clause is what gives a lender real leverage. Without one, a lender who sues over missed payments can only recover payments already overdue, not the whole balance. With one, a single default lets the lender demand everything at once. One caveat: if the borrower cures the default before the lender formally invokes the clause, the lender may lose the right to accelerate.4Legal Information Institute. Acceleration Clause
Collateral Description
For a secured note, describe the collateral precisely. A vehicle gets the year, make, model, and VIN. Real estate gets the full property address and the legal description from the deed. “My car” or “the house” invites problems you do not want.
Governing Law
A governing-law clause names the state whose laws will control the note. It matters most when the parties live in different states, because it heads off a fight over which rules apply. Use the word “governed” rather than “interpreted” or “construed.” Some courts read the narrower words as covering only how the contract is read, not other issues like available defenses or damages.
Other Clauses Worth Including
Depending on the deal, consider a prepayment clause (whether the borrower can pay early without penalty), an attorney’s fees clause (which side pays legal costs if the note is litigated), and a severability clause (if one provision is found invalid, the rest survives). None of these is strictly required. All of them close gaps that get expensive later.
Interest, the AFR, and What the IRS Expects
This is where private loans, especially between family members, quietly go wrong. The IRS does not ignore no-interest or below-market loans.
If you lend money and charge less than the Applicable Federal Rate (AFR), the IRS treats the gap between what you charged and what the AFR would have produced as “foregone interest.” That foregone interest is taxable income to you as the lender, even though no money changed hands. Between family members, it is also treated as a gift from lender to borrower.5Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
The AFR changes monthly and depends on the loan term. For early 2026 the annual rates are roughly 3.5% to 3.6% for short-term loans (three years or less), 3.8% to 3.9% for mid-term loans (over three and up to nine years), and 4.6% to 4.7% for long-term loans (over nine years).6Internal Revenue Service. Rev. Rul. 2026-3 Applicable Federal Rates for February 2026 Pull the current month’s AFR before you set the rate, and write a rate that is at least that high if you want to stay out of the imputed-interest rules.
There is a small-loan exception. If the total you have lent one person is $10,000 or less, the imputed-interest rules generally do not apply, unless the borrower uses the money to buy income-producing assets like stocks or rental property.5Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
On the reporting side, a lender who receives $10 or more in interest in a calendar year should report it on their tax return, and more formally structured loans may call for a Form 1099-INT.7Internal Revenue Service. About Form 1099-INT, Interest Income
Signing the Note
Only the borrower is legally required to sign a promissory note.8Legal Information Institute. Promissory Note The note is the borrower’s promise to pay, so the borrower’s signature is what binds it. Lenders often sign too, to acknowledge receipt or confirm terms, and that is fine, but it is not what makes the note enforceable.
A witness adds protection, especially on larger loans; a witness can later testify that the borrower signed voluntarily. Notarization goes further: a notary verifies identity and attests to the signature. No state requires notarization for a basic promissory note, but some states require it for notes secured by real estate. Even where it is optional, notarization strengthens the document in court.
Before anyone signs, both parties should read the whole document, out loud if that is what it takes. A surprising share of promissory-note disputes trace back to one party claiming they did not read or did not understand a particular clause.
After the Note Is Signed
The signed original is a negotiable instrument, and physical possession of it usually matters when it comes time to enforce. Store it in a fireproof safe or safe deposit box. Give each party a copy for reference, but keep the original in one place.
Keep a running payment log: date, amount, and how much went to principal versus interest. Both parties should keep their own records. If the borrower pays cash, a signed receipt every time is not optional. Clean payment records are the strongest answer to “I already paid that.”
When the borrower finishes paying, the lender should mark the original “Paid in Full,” add the date, sign it, and return it to the borrower. A short satisfaction letter is a useful backup. For secured notes, the lender has to release the lien on the collateral. Skipping this step leaves the borrower unable to prove a loan was repaid while the lender still holds an unmarked original — a position no one should be in by accident.
Mistakes That Make a Note Unenforceable
A few drafting failures recur more than any others:
- No borrower signature. Without the maker’s signature, there is no enforceable note, and you cannot fix it after the fact.
- Vague terms. “To be repaid when possible” or “at a reasonable rate of interest” gives the borrower room to argue nothing was ever settled. Courts do not fill blanks for you.
- Interest above the state usury cap. The lender can forfeit all interest, and in some states face further penalties. Not knowing the cap is not a defense.
- Losing the original. Proving you hold the debt becomes much harder without the original document, which courts treat as primary evidence.
- Unauthorized changes. Any change after signing must be agreed to and initialed by both parties. Unilateral edits can void the note entirely.
You do not need a lawyer to write a valid promissory note. For loans above a few thousand dollars, or any loan secured by real estate, having an attorney review the draft before signing is inexpensive compared with what a bad note costs later.