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If you're involved in a small or medium-sized loan between friends or family, a comprehensive loan agreement probably won't suit. In these cases, a promissory note is more suitable.
You can easily write a promissory note yourself and set the payment terms to whatever you like. You also don't need assistance from a lawyer to make the note legally enforceable.
A promissory note is a legal document that represents a promise from one party to pay another party a specific sum of money at a certain date or on-demand, according to the terms of the note.
Unlike an IOU that only states a debt amount, a promissory note details the terms under which the borrower must repay the borrowed amount and the consequences of failing to do so.
A promissory note is an option to consider if the borrower or lender wants written evidence of the loan without the hassle of a formal loan agreement.
You can use a promissory note as a borrower or a lender, and are usually used by non-traditional money such as individuals or corporations.
These documents are commonly used for moderate-sized loans between family or friends where specific repayment terms are needed.
A promissory note could be suitable for:
A loan agreement is a more comprehensive document compared with a promissory loan. A loan agreement includes more detailed terms for how the loan will be repaid and consequences for failing to meet the terms.
You may need a loan agreement notarised and/or witnessed to make it legally enforceable, depending on where in Australian the agreement is made.
When creating a promissory note, keep the terms simple.
A promissory note needs to include the following to be legally enforceable:
Avoid including convoluted additional charges or frameworks for variations to the agreement. A complex agreement could be classified as a financial product and governed under the Corporations Act 2001, which doesn't offer the same methods of debt collection if the borrower deviates from the payment terms. Promissory notes in Australia are governed under the Bills of Exchange Act 1909 (cth).
Payments terms can be to:
If a borrower falls behind or stops payments, the first step is to send them a letter of demand. A letter of demand reminds the borrower of the payment terms and threatens legal action if they're not met by a specific date.
If the borrower does not comply, you can seize the collateral used to secure the loan and seek court enforcement for them to repay the outstanding debt (minus the cash value of the collateral). The Australian Consumer and Competition Commission can advise you about debt collection methods.
A promissory note does not need to be witnessed to be enforceable, except for in some Australian states. However, you will have an easier time getting court enforcement for a promissory note that was witnessed by an independent and objective witness, also called a Justice of the Peace (JP).
Either party's circumstances could change after a promissory note is issued. A lender might need their money back sooner than expected or a borrower might need more time to pay.
A promissory note can easily be amended by attaching an amending agreement, also known as a contract addendum, to the original note. The amendment is only valid if both parties gave informed consent to the changes.
If you've lent money to someone and they've repaid it according to the terms of your promissory note, you don't need to do anything.
If a lender and borrower agree to end repayments before the terms of a promissory note, the lender can issue a release of liability to the borrower.
You don't legally need a lawyer to issue a promissory note. You can write your own by including the required details and payment terms (see more information here). You also have the option of using an online template.
Promissory notes are short documents, but a template can save you time and can ensure that you include everything required for a legally-binding promissory note.
Here is a selection of websites that offer free promissory note templates.
You can find more legal document template websites recommended by Finder here.
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