Promissory Note: Free Template + Generator
A Promissory Note is the legal document that converts "I'll pay you back" into an enforceable obligation. Used whenever someone lends money to someone else outside of a bank — a parent lending to a child for a down payment, a friend financing another friend's car, a business partner advancing funds. This guide explains what belongs in one and gives you a free interactive generator at the bottom.
When to use a Promissory Note
- Family loans. A parent lending money to a child should ALWAYS document it as a loan, not a gift. Without documentation, the IRS may treat it as a taxable gift, and the parent has no legal way to ever recover the money.
- Friend or partner loans. Any private loan above the "couple hundred dollars between friends" threshold. The friendship survives if the loan is documented; it usually doesn't if the loan is informal and the borrower struggles to repay.
- Seller financing. When a seller of a vehicle, business, or other asset accepts payments over time rather than full cash up front.
- Convertible loans between business partners. One partner lends the company money with terms for repayment or conversion to equity.
- Down payment gifts that are really loans. Many mortgage lenders require any down payment funds from family to be documented as either a true gift or a loan (with a real repayment schedule). Vague is not an option.
What goes in a Promissory Note
- Date and governing state law.
- Names and addresses of borrower and lender.
- Principal amount — the dollar amount being lent.
- Interest rate, including how it's calculated and when it accrues. Stating "0%" interest is allowed but creates tax issues (the IRS may impute interest at the federal "applicable federal rate" for family loans; talk to a CPA).
- Repayment schedule. Monthly payments? Quarterly? Balloon payment at maturity? Be specific.
- Maturity date — the absolute final date the loan must be fully repaid.
- Late fee for payments past due.
- Default provisions — what happens if the borrower stops paying.
- Prepayment rights — can the borrower pay early without penalty? (Usually yes for private notes.)
- Attorneys' fees clause — borrower pays lender's legal fees if lender has to sue to collect.
- Borrower's signature. Lender typically doesn't sign (the note is the borrower's promise to the lender; the lender's signature is on a separate loan agreement if there is one).
Secured vs. unsecured notes
An unsecured note has no collateral. If the borrower stops paying, the lender's only recourse is to sue for the money owed. Most family/friend loans are unsecured.
A secured note is backed by collateral — typically real estate (via a deed of trust or mortgage) or a vehicle (via a title lien). If the borrower defaults, the lender can foreclose on or repossess the collateral. Secured loans against real estate require a separate recorded instrument (deed of trust or mortgage), not just the note. Consult a real estate attorney.
The generator below produces an unsecured note only. For secured notes, talk to an attorney.
The interest rate question
Interest on private loans is governed by:
- State usury laws. Each state caps the maximum legal interest rate for personal loans. Common caps range from 8% to 21% APR. Charge more than the state's usury cap and the note may be unenforceable (in some states the entire loan, not just the interest above the cap).
- IRS Applicable Federal Rate (AFR). For family loans, the IRS sets a minimum interest rate. Charge less and the IRS treats the difference as imputed interest income to the lender (and a gift back to the borrower). Talk to a CPA for amounts above $10,000.
Reasonable starting points: 3-7% for family loans (low end during low-rate environments, higher when rates are higher); 5-10% for friend/partner loans; whatever both parties agree on for arm's-length transactions, subject to the state usury cap.
Common questions
Does the note need to be notarized? Generally no, except for some recording purposes. Notarization isn't legally required for the note itself to be enforceable. Many people notarize anyway as evidentiary backup.
What if the borrower defaults? The lender can sue for the unpaid balance. Small claims court works for amounts up to the state limit (typically $5,000-$15,000). Above that, you'll need a regular civil action. The attorneys' fees clause in the note (if included) means the losing party pays the winner's lawyer.
Can a note be transferred? Yes — promissory notes are negotiable instruments. The lender can sell or assign the note to a third party. The note can include language restricting transferability if both parties want.
What about state-specific forms? Some states (California, New York, Texas) have specific disclosure requirements for consumer loans. This generator produces a general-purpose note appropriate for private informal lending; for any commercial or consumer-finance arrangement, consult an attorney.
Free Promissory Note generator
Fill in the fields below and download an unsecured Promissory Note PDF. Both parties should keep a signed copy. Free, no email required.
This generator produces an unsecured promissory note for private lending. It is not appropriate for secured loans (collateralized by real estate or vehicles), commercial lending, or consumer-finance arrangements. State usury laws cap maximum legal interest rates; rates above the cap may render the note partially or wholly unenforceable. For loans involving real estate collateral, family loans above $10,000, or any commercial purpose, consult a licensed attorney and a CPA.