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If you have never used a promissory note template before, you may be feeling a bit overwhelmed by the terminology and purpose of promissory notes and promissory letters.

To help, here is a look at what promissory notes/letters are, and how you can effectively use them as both a borrower and a lender.

What is a Promissory Note Letter?

Promissory notes, oftentimes called promissory letters, are legally binding contracts that are more formal than a verbal agreement, but less formal than a standard loan from a bank. Typically, promissory notes are used in situations where family or friends are lending money to each other.

Secured vs. Unsecured Promissory Notes

There are two types of promissory notes: secured and unsecured, and you may be confused by the many promissory note samples for both.

To clarify, secured promissory notes are ‘secured’ or backed by some form of collateral – for example, a deed to a piece of property. On the other hand, unsecured notes are not backed by any form of collateral. Unsecured promissory notes are much riskier than secured promissory notes since the lender is not guaranteed to receive collateral in the event that the borrower is unable to pay back their loan.

What are the Benefits of Using a Promissory Note – for Borrowers?

For borrowers, there are many benefits of using a promissory note template. One of the main benefits being the fact that promissory notes enable you to still borrow money – even if your credit score is bad. Additionally, this private debt will not be reflected in your credit score, so newer businesses may find promissory notes particularly useful if they are not quite ready to take on ‘official’ debts just yet.

What are the Benefits of Using a Promissory Note – for Lenders?

Lenders can also benefit from using promissory notes. Given the high-risk nature of promissory notes, lenders can often charge an interest rate much higher than average. Additionally, individuals or businesses who often loan money to friends or family members can make verbal agreements much more official with a promissory note. In some cases, lenders can also sell promissory notes for cash to debt collection agencies. However, these promissory notes will sell for much less than the principal value.

Best Practices for Using Your Promissory Note Template

Only execute a promissory note with those that you trust

Promissory notes are much riskier than a typical bank loan. Therefore, it is highly recommended to only execute a promissory note with those that you trust. For lenders, that means those who will make their payments on time. And for borrowers, that means those who will not take them to court over a missed payment or charge outrageous late fees.

Be extra specific about the terms

Before crafting your own promissory note, always make sure to use a promissory note template as a starting point. These templates will have a place for all of the specific information that you should include in your note, including:

• Amount and interest of the loan
• Payment schedule
• Date for when the full payment is due
• Clause for what happens in the event of a default

It is important to outline every detail about your agreement, and a promissory note template word document can help to ensure that you do not forget anything.

Never miss a payment

Promissory notes often carry with them interest rates that are much higher than standard loan rates from a financial institution. For borrowers, that means that it is critically important to never miss a payment on a promissory loan, as the interest owed will only increase. Not to mention you may also be hit with expensive late fees.

Always keep an extra copy of the agreement on file

The terms outlined in promissory notes can sometimes get complicated. That’s why it’s always important to keep an extra copy of your promissory loan letter on file so that you can reference it when needed. This helps borrowers stay on top of their payments, and lenders can know the correct terms in the event of a missed or late payment.

Before signing, be aware of the associated risks

Before executing a promissory note with a friend, relative, or business partner, it is important for all parties to be aware of the associated risks involved.

Borrowers who sign a secured promissory note template should understand that their collateral can be seized in the event of a default. Therefore, only take on the risk of a promissory note if you are sure that you will be able to pay the principal amount with interest.

Lenders should also be aware that there is a risk that the borrower may not be able to pay. Never lend an individual or organization more money than you are comfortable with losing in a worst-case scenario.