Promissory Notes

Promissory Notes are essentially a legal document in which one party (the maker) promises to pay the owner or holder of the note. It is basically a loan document. Often we see clients who sell a business or loan money to a family member, close friend or employee. It is very important to make sure that if you loan someone money that you have a written agreement setting out the terms of your loan situation. We have litigated several cases where the person you trusted and loaned money later fails to make payments to you.

There are some important items to consider when drafting a promissory note. A promissory note should clearly identify the parties full legal name and address. I also recommend obtaining copies of their driver’s licenses and having them sign in the presence of a notary public, to prevent them from later stating that they ever signed such a document.

The note should clearly state the amount borrowed, percentage interest rate to be charged, the term length that they must repay you by, and how the payments are to be made. A knowledgeable attorney should prepare an amortization table for you so that you can clearly see your repayment table. It is also helpful to provide this to the other party so that they cannot later come back and say that they were not aware of certain payments.

Such table should also clearly indicate any balloon payments as well, with any required Civil Code language if it is related to a residential loan.

Careful consideration should also be paid to default provisions and late payment provisions. There should be penalties incurred for late payments to incentivize timely payments to you.

Lastly, when loaning money to another person, it is so very important to make sure that you have a Deed of Trust prepared by a knowledgeable attorney. Having a Deed of Trust signed and recorded against someone’s real property will help protect your funds, and help ensure that you are paid back your money. Often this step is missed, and many people are unable to obtain their money back once the borrower stops making payments.