Do I need a Promissory Note if I'm loaning money?

LawsOnline
June 01, 2024

When agreeing to loan money to an individual, a family member, a friend, or a small business, it is highly recommended that you document the financial loan with some kind of written agreement. In many cases, individuals exchange money on a daily basis and, it is generally handled as a quick loan with a verbal agreement and a handshake. It is estimated, according to Finder, that $184 billion dollars each year is exchanged between family and friends as private loans. As stated by LendingTree, the percentage of Americans involved in private loans equals about 1/3 of the United States’ population. These verbal types of agreements for financial loans are not required to be put into writing if they can be paid back within a year or less, and are no greater than $500.00, depending on the individual state (see Statute of Frauds). However, they become difficult to manage if the financial exchange arrangement is later disputed on the terms of the verbal arrangement. If you value your relationships, both personal and professional, and you want to keep your sanity intact, it is highly recommended that loans of any amount be put into some form of a written agreement.

A written agreement or contract to borrow money, in exchange for repayment plus interest at a later date, is usually called a promissory note. A promissory note should include the following:

Amount of Loan

Date of Loan

Name of Debtor

Name of Creditor

Rate of Interest (if any)

Payment Amount and Frequency

Due Date of Loan

Type of Loan (i.e., secured or unsecured)

If Secured, Collateral (i.e., a bike)

Signature of Debtor

With an unsecured Promissory Note, there is no property associated with the loan only a promise to repay the debt. If the debt is not paid on the established due date, the Creditor's only recourse is to take the Debtor to court to fight for repayment of the loan. If a Promissory Note is attached to the loan, it acts as an enforceable document that allows the courts to take action against the Debtor and require a repayment of the Promissory Note. To view a sample of an unsecured Promissory Note, please see the following: SHORT PROMISSORY NOTE

With a secured Promissory Note, designated property as a form of collateral is used to insure the money is repaid to the Creditor by a designated date. Therefore, if the Debtor does not pay back the loan in a timely manner, the Creditor can claim the designated property as repayment for the Promissory Note. The secured Promissory Note will outline when the Creditor can take possession of the collateral i.e., if payment has not been received within 30 days after the due date, the Debtor will relinquish to the Creditor ownership of the collateral within 60 days after default of payment. To view a sample of a secured Promissory Note, please see the following: LONG PROMISSORY NOTE

In most cases, an additional document called a Security Agreement, with an attached Security Agreement Property List, is used to describe the designated property. This would be a separate agreement from the Promissory Note that is signed by both parties providing greater detail of the collateral and the legal conditions that may take place if the Debtor fails to pay back the Promissory Note. To view a sample of a Security Agreement and a Security Agreement Property List, please see the following: SECURITY AGREEMENT SECURITY AGREEMENT LIST

Once the Creditor has a signed secured Promissory Note and the accompanying Security Agreement, they need to file a UCC document to establish collateral precedence over any other party who may make a claim to the same property. A UCC filing must be submitted to the state in which the property resides. This is an important process for the holder of a secured Promissory Note to locate the state office that handles UCC fillings. A UCC filing on a secured Promissory Note provides notice to the public and other lenders that the Creditor and Debtor have a contractual relationship binding the property to their specific agreement, making the Creditor 'first-in-line' to assume ownership of the property. The UCC, which stands for Uniform Commercial Code, is a collection of legal rules related to commercial activities within the United States (see https://www.uniformlaws.org/acts/ucc). Almost every state within the United States has adopted the standards of the UCC to create consistency for commercial transactions that are conducted between states. Pennsylvania was the first state to adopt the UCC in 1953 (see https://www.uniformlaws.org/acts/ucc).

Whether you are extending a loan for financial gain, i.e., interest/profit/stock, or helping a friend with debt, make sure to put that private loan into writing as a Promissory Note. For answers to your questions about Promissory Notes, please search LawsOnline - the National Database of Legal Professionals to find an attorney near you from one of the largest databases of legal professionals.