How to Execute a Promissory Note

by Linda Richard

A promissory note is an agreement by a borrower to pay money to the lender or payee, and "execute" sounds like serious terminology. The promissory note includes interest, terms of payment and conditions for default. The promissory note may have language at the end, “Executed this blank day of blank” and the year. The borrower executes the promissory note when he completes the blanks and signs with a witness or notary as required by state law.

Borrower

Contact your attorney to prepare a promissory note on your terms. Unless the lender uses a standard form from your state, preparation of a promissory note by the lender or the lender’s attorney results in terms favorable to the lender.

Negotiate terms for the promissory note with the lender, including the amount, the interest rate and the number of years or months you want to borrow the money. Some promissory notes require monthly or yearly installment payments; others have only one payment at the end of the term.

Request a copy of the promissory note in draft form. You want time to study the negotiable instrument and make certain that the terms and figures are correct. You are signing an enforceable legal document.

Ask questions if you don’t understand some of the wording or terms. This agreement obligates you to pay the money back or be subject to the consequences. Consequences might be that the entire amount of the promissory note becomes due, along with interest. You might owe attorneys’ fees if the note requires collection.

Execute the promissory note when you are satisfied that the terms meet your needs. Sign before a witness or a notary as required by your state.

Make a copy of the promissory note for your files. You’ll need the address to send the payments, and you may need to refer to the terms.

Lender

Establish the terms for the promissory note with the borrower. Agree to the total amount, the interest rate, the date and address for payment and the amount of payments. Discuss failure to make payment and the consequences.

Ask your attorney to prepare the promissory note with the agreed terms or, if the borrower wants to prepare the note, ask your attorney to review the terms and make corrections.

Contact the borrower and provide a final copy of the promissory note. He may choose to have an attorney review the document before signing.

Follow up with the borrower to be sure he executes the promissory note and returns the original to you.

Review the executed copy of the promissory note for completion, checking for the date of execution and the witness or notary signatures required to make the document legal.

Retain the original of the executed promissory note until the borrower pays the loan in full. Provide the borrower with a release and the original promissory note marked “Paid” once the borrower fulfills all obligations under the note.

Tips

  • A promissory note must comply with the law of the state where it is executed. A promissory note may violate statutes in some states. For example, in Connecticut, an employer can't require a promissory note for payment for training costs.
  • A demand promissory note allows the lender to call in the note and require you to pay the total amount at any time upon request.

Warnings

  • As an investor, you may be interested in promissory notes as an investment. The SEC warns the public to be cautious of promissory note investments, because fraudulent schemes are common.
  • Be cautious of signing a note that requires a large payment at the end of the term. You may pay for years and not be able to make the balloon payment.

About the Author

Linda Richard has been a legal writer and antiques appraiser for more than 25 years, and has been writing online for more than 12 years. Richard holds a bachelor's degree in English and business administration. She has operated a small business for more than 20 years. She and her husband enjoy remodeling old houses and are currently working on a 1970s home.

Photo Credits

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