What are some tips for creating a personal loan promissory note?


Quick Answer

Some tips for creating a personal promissory note include specifying an interest rate to satisfy Internal Revenue Service requirements for large loans and using the borrower's personal property to secure the loan. A promissory note is a written agreement, or promise, to pay back money to a person or business, explains Nolo. The written document serves as evidence of the amount of the debt and the terms of the agreement.

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Full Answer

Creating a personal promissory note is a simple matter of drafting a document stating the amount of the loan, the amount of interest applied to the transaction, if any, and the repayment schedule, notes Findlaw. After the parties sign the document, the lender has an enforceable promise to pay that can hold up in court. While charging interest on the loan may not be an issue for small loans between family or friends, the IRS may treat the waiver of interest on a large loan as a gift to the borrower, estimate interest on the loan and classify it as income. One tip for avoiding the involvement of the IRS is to include interest on all promissory notes for loans of any substantial amount, even if the interest is nominal.

Another thing lenders should keep in mind when creating a personal promissory note is the option to secure it with personal property, such as the borrower's car or computer, advises Nolo. The collateral can potentially be seized if the borrower doesn't repay the loan as agreed.

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