A simple promissory note with no interest is a short written document in which one person promises to repay borrowed money to another at a stated rate of 0%. To be enforceable, it needs to be in writing, signed by the borrower, and contain an unconditional promise to pay a fixed dollar amount on a specific schedule or on demand. You do not need a lawyer or a notary to create one, but if the loan is larger than $10,000, the IRS has rules about interest-free loans that both sides should understand before signing.
Elements the Note Must Contain
A promissory note becomes legally binding once the borrower signs it. Before that signature does any work, the document itself has to include a few specific things:
- The full legal name and address of both the lender and the borrower.
- The exact principal amount being loaned, in dollars.
- An unconditional promise to repay. “Unconditional” means the promise cannot depend on something else happening first. A line like “I’ll pay you back once I sell my car” turns the note into an unenforceable wish.
- The interest rate, written as “0%.” Do not leave the field blank. A blank interest line invites a later dispute about what the parties actually agreed to; “0%” makes the intent unmistakable.
- How and when repayment happens (a single date, a monthly installment schedule, or on demand).
- The date the note is signed.
Skipping any of these gives the borrower an easy argument to avoid repayment later. Everything else is optional, but a few clauses are worth adding if they fit the situation, and those are covered in the sections below.
Choose a Repayment Structure
The two common structures for personal notes are term notes and demand notes, and they behave differently.
A term note sets a specific schedule. That might be one lump sum on a set date, or installment payments such as $500 on the first of each month for 24 months. Both sides know exactly when money is due, and if the borrower pays on time the lender cannot demand early repayment. Most written notes between friends or family use this structure because the predictability keeps the arrangement calm.
A demand note has no fixed due date. The lender can request full repayment at any time. Building in a notice period, commonly 30 days, keeps the borrower from being blindsided. Demand notes give the lender flexibility but can strain a relationship because the borrower never knows when the call might come. They also work differently for tax purposes, as noted below.
How the IRS Treats Interest-Free Loans
Lending money at 0% between individuals is legal, but the IRS does not simply ignore it. Federal tax law pretends the lender charged interest at the Applicable Federal Rate (AFR) and then gifted that interest back to the borrower. Whether that fiction produces an actual tax bill depends on the loan’s size.
$10,000 or Less
If the total outstanding balance between the same two people stays at or under $10,000, the IRS applies a de minimis exception and imputes no interest at all. The zero-interest arrangement carries no tax consequences for either side. The one catch: the borrower cannot use the money to buy stocks, rental property, or other income-producing assets. If they do, the exception disappears and the full imputed-interest rules apply regardless of the loan’s size.1Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
$10,001 to $100,000
For gift loans in this range, imputed interest is capped at the borrower’s net investment income for the year (dividends, interest, capital gains, and similar returns). If the borrower’s net investment income is $1,000 or less, it is treated as zero and the lender owes no tax on imputed interest that year. Mid-sized family loans are usually painless from a tax standpoint when the borrower is not an active investor.1Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
Over $100,000
Once the total outstanding balance exceeds $100,000, the net-investment-income cap no longer applies. The IRS imputes interest on the full balance at the AFR: the rate is set for the month of the loan on a term note, or recalculated each year on a demand note. The lender must report this phantom interest as income even though no money changed hands.1Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
What the AFR Looks Like
The IRS publishes updated AFRs every month. For June 2026, the annual rates are 3.85% for short-term loans (three years or less), 4.13% for mid-term loans (over three years but not more than nine), and 4.87% for long-term loans (over nine years).2Internal Revenue Service. Rev. Rul. 2026-11 On a $50,000 interest-free loan with a five-year term, the mid-term AFR produces roughly $2,065 in imputed interest for the first year. Whether that creates a tax bill depends on the borrower’s net investment income under the tier rules above.
Gift Tax
Separately from imputed interest, the IRS treats the forgone interest as a gift from lender to borrower. For 2026, the annual gift tax exclusion is $19,000 per recipient. On most personal loans under $100,000, imputed interest sits well below that threshold and no gift tax return is required. On very large loans it could push the lender past the annual exclusion, but no gift tax is actually owed until the lender exceeds the lifetime exemption, which is $15,000,000 for 2026.3Internal Revenue Service. What’s New – Estate and Gift Tax For most families the real risk is paperwork, not a tax bill.
Signing, Notarizing, and Storing the Original
Once the terms are on paper, the borrower signs. That signature turns the draft into a binding obligation. In most jurisdictions only the borrower’s signature is legally required, since the borrower is the one making the promise. The lender’s signature is not necessary for enforceability, though many templates include a line for it and there is no downside to having both sides sign.
Witnesses and notarization are optional but useful if the borrower later claims they never signed or were pressured. A notary’s stamp creates an official record of the signer’s identity and willingness. Notary fees for a single acknowledgment typically run between $5 and $25 depending on the state. For any loan large enough that a default would end up in court, that cost is worth it.
The lender keeps the original signed note and gives the borrower a photocopy or scan. That original is the lender’s primary evidence in court, so store it somewhere secure.
Tracking Payments
Every payment should leave a paper trail. Bank transfers and checks create automatic records. For cash, the lender should issue a written receipt showing the date, amount, and remaining balance. A running payment log kept by the lender is useful backup if records are ever disputed.
A late-fee provision is worth including. Courts generally enforce late fees on promissory notes as long as the amount is reasonable and proportional to the lender’s actual inconvenience. A flat $25 or 5% of the missed payment are both typical. Fees that look more like punishment than compensation for the delay risk being struck down as unenforceable penalties.
When the borrower makes the final payment, the lender should write “Paid in Full” on the original note, add the date and their signature, and return the marked-up original to the borrower. Both sides should keep a copy. This formally closes the debt and prevents any future claim that a balance remains.
Planning for a Default
Nobody wants to plan for missed payments, which is exactly why the note should address them. An acceleration clause lets the lender demand the entire remaining balance immediately after a missed payment rather than suing separately over each installment as it falls due. Most acceleration clauses do not fire automatically; the lender chooses whether to invoke the clause after a default. If the borrower catches up before the lender sends a formal demand, the right to accelerate may be lost.
Without acceleration, the lender can only sue for payments already past due. On a long installment loan, that could mean multiple lawsuits, which is expensive and impractical for personal lending.
The lender’s main remedy on an unpaid note is a breach-of-contract lawsuit. Small claims court is often the fastest and cheapest option for smaller amounts, though monetary limits vary widely by state. Larger amounts go to a higher trial court. The signed note is the strongest evidence in either forum, which is why keeping the original matters.
Statutes of limitations for enforcing promissory notes vary by state, typically running from three to ten years. The clock usually starts from the date a payment was missed on an installment note, or from the maturity date on a lump-sum note. Once the limitations period expires, the lender loses the ability to sue even if the debt is legitimate. If you are lending a significant amount, know your state’s deadline and do not let it pass without acting.