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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.
What is a promissory note?
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.
Download this template at Lawpath
When should I use a promissory note?
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.
What can you use a promissory note for?
A promissory note could be suitable for:
- Purchasing a vehicle
- Starting a business
- Buying a home or performing essential renovations
- Consolidating debt at a lower interest rate
Promissory note vs loan agreement
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.
What does a promissory note include and not include?
When creating a promissory note, keep the terms simple.
A promissory note needs to include the following to be legally enforceable:
- Date of issue
- Name of lender
- Name of borrower
- Addresses of both parties
- Telephone numbers of both parties
- Amount of money borrowed
- Payment terms such as dates and amount of instalment payments
- Whether the loan must be repaid upon demand
- Interest rate (not required)
- Terms for missed or late payments
- Collateral security for the event of the terms of the note being broken such as valuable jewellery, vehicles, and real estate
- Date by which the loan must be repaid in full
- Signature of the borrower (the lender does not need to sign)
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).
What payment terms can you use?
Payments terms can be to:
- Pay the full amount on a specific date, with or without interest
- Pay the amount spread over a defined timeframe, with or without interest
- Pay minimum instalment payments over an undetermined timeframe, with interest accruing on the initial borrowed amount.
How effective is a promissory note?
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).
Can I change a promissory note?
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.
How can I terminate a promissory note?
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.
Do I need a lawyer for a promissory note?
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.
Get access to customisable promissory note templates online
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Where to get free legal documents and templates like promissory notes
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.
- Lawpath. Lawpath is an online legal resource for small businesses and entrepreneurs. You can browse contract samples for free on its website, but you must create an account to access customisation options.
- LegalVision. LegalVision is a commercial law firm that offers a free promissory note template in exchange for your contact details. They offer unlimited use of all their legal documents for a monthly membership fee.
- LawDepot. LawDepot provides a vast array of free legal documents. You can complete them online before downloading them straight to your computer.
- Wonder Legal. Wonder Legal offers more than 140 legal document templates, any of which can be purchased for a one-time fee for full customisation.
You can find more legal document template websites recommended by Finder here.
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