Put simply, a promissory note is a written promise to pay a definite amount of money on specified date(s) or on demand. The primary purpose of a promissory note is to evidence a loan amount, interest rate, if any, and other terms on which a loan is to be repaid. Depending on the type of transaction involved, a promissory note may or may not accompany a security agreement, a deed of trust, or other contractual documents.
Reasons to Have a Promissory Note Drafted
Reason #1: Statute of Frauds. Every state has a statute of frauds, requiring that certain contracts be reduced to writing before a court may enforce them. In other words, oral agreements are unenforceable in these circumstances. In California, the Statue of Frauds is found at California Civil Code §1624, and includescontracts which cannot be performed within a year, an agreement by a purchaser of real property to pay an indebtedness secured by a mortgage or deed of trust upon the property purchased, or the sale of goods in excess of $500.00, among other types of contracts. For more information on the kindsof contracts covered by the California Statute of Frauds, click here.
Reason #2: Avoid Disputes. Even if a written contract is not required by applicable laws, having a written document which sets forth the terms on which money is borrowed and repaid oftenprevents disagreements and lawsuits when it comes time to repay the loan.As our business attorneys have discussed in previous articles, some oral agreements are enforceable. However, failing to reduce any agreement to writing creates a situation which is ripe for litigation, something we all want to avoid.
When negotiating a fair interest rate on a loan, it is important not to violate California’s usury laws. Usury is defined as the illegal action or practice of lending money at unreasonably high rates of interest. Pursuant to California law, the maximum interest rate an unlicensed private individual may generally charge on a loan is 10% per year on the unpaid balance owed. In case you’re wondering, California usury laws do not apply to most lending institutions, so your credit card company is free to charge whatever rate of interest they choose.
Additional terms which should be included in a well-drafted promissory note include:
- Full name of the lender(s) (the “Payee”);
- Full name, address, and other contract information for the borrower (the “Maker”);
- Date the money is loaned;
- Amount of money loaned;
- Interest rate if the borrower defaults on payment, if applicable;
- Date(s) on or by which the loan will be repaid;
- How the loan will be repaid;
- Security or collateral, if any;
- Consequences if the loan is not repaid on time;
- Signature of both parties and either a witness or notary;
- Reference to contracts being executed in conjunction with the note, if any.
Our business lawyers hear from business owners and individuals regularly who neglected to spend the money to obtain a properly drafted promissory note and are thereafter forced to spend thousands of dollars in litigation costs. Some contracts, like promissory notes, don’t have to be 20 pages long to carry a great deal of legal force. When lending or borrowing money, don’t forgo the formalities—get it in writing. The trusted attorneys at Gehres Law Library have the expertise to protect clients from unwanted disputes and lawsuits. If a dispute has arisen, our business litigation lawyers work aggressively to protect clients’ interests. Call or write us today for a free evaluation.