FastDue.com - Using a Promissory Note

Using a Promissory Note

A promissory note is basically a loan agreement whereby the Promisor agrees to repay a loan or obligation to the Promisee. Think you don’t need to bother to ask for one if you’re lending money to friends or family?

Think again. Advice columns are jammed with pleas for help from now impoverished elderly parents whose feckless children had sworn—right before they disappeared—that they had a no-lose business deal and would pay them back with lavish (unspecified) interest. Personal finance shows frequently feature angry siblings who have discovered that one of the kids got a massive pre-paid extra inheritance because there was no paperwork on the loan made by a doting parent.

If your child (or parent) wants to borrow money, simply use FastDue’s free promissory note form to give notice that you need and expect to be repaid; you’ll also make your executor’s work easier. And if Joe Blow down the street comes to you with a request for money to finance his fabulous business idea, ask him to sign a FastDue promissory note, even if you truly think he has the best idea in the world. People who are genuinely looking for a loan, not a gift, will be happy to sign on the electronically dotted line.

If for no other reason, it is important to use a promissory note for tax and accounting purposes. The IRS could slap you with gift tax if you have no written evidence to prove that you made a loan, or you might not be able to write off a loss. You could also run up against imputed interest rules.

Promissory notes made in the US may, under certain conditions, be considered negotiable instruments governed by article three of the Uniform Commercial Code (UCC).

How to Use a Promissory Note

FastDue’s free promissory note template is as fast, intuitive, and simple to use as our other free legal documents and invoices. The basic provisions are essential for ANY promissory note; we just make it easy for you to customize, negotiate and send an agreement. Free of charge.

Upload your own logo for a professional look if this is a business loan, or leave ours in place. Click the X to send with no logo.
Click on each clause to modify or insert your own terms, or delete entirely at the X.
Name both the lender and the borrower, and specify the amount in question and the interest rate.
Tip: Don’t charge such a high interest rate that you could fall foul of usury laws, usury being an illegally high interest rate. You could see your interest rate reduced to zero and even become subject to criminal charges. Check your state’s usury laws carefully; do not assume that you are safe in charging the same stratospheric rates as your bank or credit card. They got a special deal.
Describe the way the loan is to be paid off, e.g. amortized (find an amortization calculator at http://realestate.yahoo.com/calculators/amortization.html); in equal installments; monthly interest-only payments with a balloon payment on a certain date; and so on. Don’t forget the date on which payments are to begin.
Include the payment dates, e.g. the 10th day of each month, grace period, and any late payment fees if applicable.
Tip: Use FastDue’s free e-mail invoice template to “remind” borrower of each payment to be made. Set the repeat feature for hassle-free reminders; give the borrower the option of immediate payment via PayPal if you like; and print the invoice out and mail it if you prefer.
Who is to get the payment (usually the named lender), and where? Make sure that you have a valid payment address, Paypal account, or bank account for direct deposit, and provably update it as necessary.
Tip: Borrowers have successfully argued that they were unable to make payments because no updated contact information had been provably provided to them. Don’t mess this up.
Prepayment penalty. This is generally used in transactions, more often real estate transactions, where the lender has upfront costs he or she needs to recoup and/or wishes to discourage prepayment. In some states prepayment penalties are illegal. Check carefully if you wish to alter this clause to include one.
Tip: Amortized loans essentially have a prepayment penalty built into them because the earlier payments are virtually all interest. If you borrow money to be repaid on an amortized schedule, don’t accept a prepayment penalty clause unless you have no better option.
Payment on default. In case the borrower declares bankruptcy or just stops making payments, include an acceleration clause whereby the entire outstanding loan will become immediately due and payable in full upon default.
Tip: A promissory note is usually unsecured, so you could be left standing in line behind any secured creditors. If the loan is large, particularly a real estate loan (very common in parent-child loans) you should consider taking out a formal lien on the property. In general, never lend any unsecured amount that you cannot afford to lose.
Specify that the borrower will be responsible for any collection costs and/or attorney fees in the event that he or she defaults on the loan.
Can this loan be transferred, i.e. is it negotiable? In other words, if Mom suddenly finds that she really needs her principal now and Sonny doesn’t have it, could she sell the loan? Spell out negotiability here, or leave the default ‘non-negotiable’ clause in place.
Tip: If you do sell a loan, be sure to send the Promisor notice of the change in Promisee (payee) and payment address by registered mail.
Negotiate any changes in the comment section.
Sign, date (essential), agree to FastDue’s terms of use, and send.
Using your free FastDue account to send agreements and invoices allows you to access them online anytime, anywhere.

Caution:

Legal requirements may vary greatly from state to state. To ensure that your agreement is valid, please check your state’s laws and modify FastDue’s free agreements accordingly. If in doubt, always consult an attorney.

A Note About Electronic Signatures

The Electronic Signatures in Global and National Commerce Act, or E-SIGN, was signed into law in 2000 and provides a consistent legal basis for the validity of electronic signatures in all states, including those such as Georgia and Illinois that had not already enacted UETA, or the Uniform Electronic Transactions Act.

An electronic signature can be as simple as typing your name into the signature space and preserving the accompanying electronic paper trail. More complex (and therefore more secure) forms include iris or fingerprint scans and encrypted digital signatures that use Public Key Infrastructure (PKI) such as VeriSign.

Electronic signatures are valid for a wide range of applications; they are not, however, valid for wills, court orders and other court documents. It is always smart to keep a back-up paper copy.

If you have any concerns at all about using an electronic signature, simply use FastDue’s free interactive template and messaging system to thrash out the details of an agreement; then print out the final result and sign it in the traditional fashion. Consult your lawyer for further information.

Comments

Srini G wrote:

Thursday, April 30, 2009 at 9:01 PM

I wanted to ask the following to you and see if there is a solution or a way to get back my money, 5000 USD an IRS employee took 5,000 USD on a promissory note from me and the person gave the IRS employee ID and driver's license as the proof at the back counter (bank of America, Bellevue, WA) and the bank took the person's finger impression on the check and gave the person 5K USD with drawing from my BOA (Bank of America) checking account This happened at Bellevue, WA (Seattle, WA area) in Aug 2007. Now it is almost 2 years (May 2009) and the person never returned any money to me. Even though, in the promissory note it was mentioned one month as due date and also interest and penalty (all such clauses mentioned) I have already reported this to IRS, HR of IRS, the person's boss at IRS and they redirected me to TIGTA and I complained to them and also obtained a case number from TIGTA in 2008, but so far nothing happened What should I do now? I got the original promissory note and scanned copy of the bank Check and with details of the person's IRS employee ID and driver's license thx and regards sri

Srini G wrote:

Thursday, April 30, 2009 at 9:01 PM

Srini G wrote:

Thursday, April 30, 2009 at 9:00 PM

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