A personal promissory note is a document that contains the terms of a loan to family or friends. While loaning money to family members or close friends can often be a sensitive matter, it may be necessary to protect yourself by recording the loan terms in writing in case there is a misunderstanding with regards to the loan terms later on. Personal promissory notes can also provide written records that can be useful for various situations, such as tax audits or if a lawsuit is filed over the loan.
There are many different types of promissory notes, such as commercial promissory notes or real estate promissory notes. All of these promissory notes are enforceable under law and operate in a similar manner to a standard contract. Although they can be used in a variety of situations, personal promissory notes are most commonly used in situations connected to divorce or child support matters in which a friend or family member needs help financing their lawsuit.
What Needs to Be Included in a Valid Personal Promissory Note?
In order for a personal promissory note to be valid, it should contain the following information:
- The names of the parties (the borrower and the lender)
- The loan amount
- When and how the loan is to be repaid
- Details regarding repayment schedules
- Whether interest will be charged, and how much
In addition to these essential pieces of information, you may also wish to include more details regarding the loan repayments. For example, you might want to state whether the loan will be repaid in monthly installments, or through a full lump-sum payment. This is very important, as many disputes can be avoided through a well thought-out repayment plan.
Finally, a personal promissory note may be secured by personal or real property of the borrower. This means that if the borrower misses some or all of the payments, the lender can be compensated through a transfer of the real or personal property of the borrower.
Do I Need to Charge Interest on a Personal Promissory Note?
The decision of whether or not to charge interest on a personal promissory note can also be a sensitive subject. For long-term promissory notes, charging interest is one way to adjust to changing economic factors, especially inflation.
You should note that if you do not charge interest on a personal promissory note, there is a good possibility that the loan could be treated as a gift, especially if it is made to a family member. This could have several unwanted consequences, especially when it comes to tax and gift tax laws. For example, the IRS may simply impose or “impute” interest on the amounts, and require that you report the interest as taxable income.
If you do decide to charge interest, you should be aware that many state laws impose limits on the amount of interest that you can charge on a personal promissory note. These laws are called “usury laws.” Rates above 15-20% are usually prohibited under these laws, and charging above this amount may even lead to legal liability on the part of a lender.
What If a Personal Promissory Note Is Not Honored?
If a valid promissory note is not honored, it could result in several legal consequences. Most personal promissory note disputes have to do with missed payments, which are known as defaults.
For example, a borrower who defaults on a personal promissory note payment may be required to complete missed payments. This is usually done through a private lawsuit, wherein the court orders the borrower to complete the payments. A failure to abide by this court order can result in further legal issues, such as contempt of court.
If a borrower is unable to pay even after a court judgment, it can have further consequences. The borrower’s property may be seized by authorities and sold in order to provide the amounts for the missed payments. Furthermore, a borrower who habitually defaults on personal promissory notes may lose certain privileges, in particular those related to child custody and visitation.
Should I Hire a Lawyer for Issues with Personal Promissory Notes?
If you need assistance with a personal promissory note, you may wish to contact a business lawyer who is experienced in promissory notes for advice, especially if the loan involves large amounts of money. An attorney can help you draft a promissory note so that it is enforceable under the laws in your jurisdiction. In the event that a personal promissory note dispute arises, an experienced can help you resolve the matter in court.