What is a Promissory Note and When Should I Use It?

What is a Promissory Note?

promisory-notes A promissory note is a documented promise to repay borrowed money. It serves as evidence of the debt the borrower has incurred and lays out the terms of the loan, such as the amount of the loan, the interest payable (if any), the repayment schedule, and what the lender can do in case the borrower doesn’t pay back the loan.

While many people have drawn up or verbally agreed to informal agreements when lending or borrowing money, it is recommended, especially in cases where a larger amount of money is involved, to formalize the agreement with a promissory note. A promissory note will give the lender a sense of security and recourse in case the borrower does not pay the money back. A promissory note will also benefit the borrower by clearly outlining when and how much they are expected to pay back.

When Should I Use a Promissory Note?

A promissory note can be used for mortgages, student loans, car loans, business loans, and personal loans between family and friends. Any time you are lending someone money and would like to be repaid, you should use a promissory note. Conversely, you should also sign a promissory note anytime you borrow money from someone where it can become problematic if the money is not paid back.

Most people will not bother to formalize a loan for a small amount of money. However, if you are going to lend or borrow a few hundred or thousand dollars, it is recommended to have a formal promissory note prepared so everyone is on the same page regarding the amount and terms of the loan.

What Should I Include in the Promissory Note?

A basic promissory note should include at least following information:
– The date it is executed
– The full names of the lender and borrower
– The loan amount
– Whether the loan is secured or unsecured
o If the loan is secured, the details of the collateral and under what circumstances the lender can take possession.
– The interest rate, if applicable
– The amount and frequency of payments
– When payments are due
– Whether the borrower has a co-signor or guarantor, and if so, their details.

It is a good idea to have a lawyer prepare or review the promissory note, to ensure that all necessary terms are included, and that the terms do not violate any laws such the sections of the Criminal Code dealing with interest, or the Personal Property Security Act which regulates the creation and registration of security interest in personal property.

How to Execute a Promissory Note?

Once the promissory note is ready, all parties to the agreement must sign it: the lender, the borrower and the co-signer (if there is one). It is a good idea for all parties’ signatures to be notarized to ensure the agreement is enforceable. Everyone who signed the promissory note should get a copy for their records.

Can I Make Changes to a Promissory Note?

Even after a promissory note is signed, it is possible to change the terms. However, you will need the consent of all parties to the original note. With everyone’s permission, you can prepare a second document noting the changes, whether the interest rate, payment amount or other terms as an amendment to the original document. All parties should then sign the amending document, and everyone should receive a copy of it for their records.

If you are lending or borrowing money from a friend or family member and would like a promissory note prepared, the lawyers at Malicki Sanchez would be glad to assist.

written by Christopher Materny