|WHAT IS A PROMISSORY NOTE?|
A promissory note is a written promise to pay money. See California Commercial Code sections 3103(a)(9) and 3104(e). If you lend or borrow money, you should put the transaction in writing in the form of a promissory note. Though usually provided by the lender, a promissory note need only be signed by the borrower.
Please see the restrictions on using this website's promissory notes in the Things to Consider section below.
|WHAT ARE SOME USEFUL DEFINITIONS TO KNOW?|
|The following definitions are useful in helping you better understand
the Unsecured Promissory Note form.
UNSECURED PROMISSORY NOTE: A promissory note for which no collateral
(some form of property) has been pledged. If the debtor does not pay,
the creditor has no property to seize, and may look only to the debtor
|WHAT IF THERE ARE TWO LENDERS OR BORROWERS?|
If There Are Two Lenders (Payees)
|HOW DO I PREPARE AN UNSECURED PROMISSORY NOTE?|
Keep reading to learn about the different ways a borrower can repay a loan, and what additional terms you may want in your unsecured promissory note.
|WHAT DIFFERENT WAYS CAN A BORROWER REPAY A LOAN?|
There are really 2 main ways to repay a loan, though each method has variations. If you use this website, you will need to select one of the 2 main ways explained below, and then use the built-in calculator to make your variations:
A. LUMP-SUM PAYMENT OF PRINCIPAL
|WHAT BASIC LOAN TERMS SHOULD I UNDERSTAND?|
In preparing a promissory note, you should understand the following basic
loan terms. They are used to calculate the repayment figures for any given
loan. If you use our
to prepare your promissory note, you will need to enter values for any
applicable loan term (some of the terms may not be applicable depending
on the repayment method chosen).
A borrower would usually want this if they are short on cash in the beginning, but expect to be able to payoff or refinance the loan in the future.AMORTIZED OVER
This is the number of payment periods used to calculate the monthly payment amount. It is NOT the number of payments in which the loan is due. The value you enter here should be greater than the value you enter for "Loan Due In."
LOAN DUE IN
For a balloon note, this is the Loan Term. You must enter the # of payment periods in which the loan is due. For example, if you enter 60 in this box, and assume you have chosen a monthly payment period, then the loan is due in 60 months. The loan will be paid off via 59 regular monthly payments, and a balloon payment due the 60th month. The value you enter here should be less than the value you enter for "Amortized Over."
|WHAT OTHER TERMS MAY BE ADDED TO A PROMISSORY NOTE?|
Other terms may be added based upon the requirements of and negotiation
between the parties involved. These optional terms are briefly discussed
EVENTS OF DEFAULT
|WHAT IS A PREPAYMENT PENALTY? HOW DOES IT WORK?|
|Sometimes, a borrower's affairs may go better than expected and the borrower
will want to payoff the loan early in order to avoid paying interest over
the whole life of the loan. This is referred to as prepaying the loan, which
may be done by increasing the amount of installments, or in one lump sum
if the borrower has enough money.
However, unless a prepayment right is placed in a note (or there is a statute authorizing it), a borrower generally has no right to prepay a loan. See Civil Code section 1490. If a lender agrees to allow prepayment, he/she will often demand a certain sum of money (usually referred to as a prepayment penalty or premium). Based on the negotiations between the parties, the prepayment premium may be avoided.
If you use the to prepare your promissory note, you must choose: 1) whether the borrower may or may not prepay the loan, and 2) under what terms and conditions a prepayment would be allowed. There are 5 choices as described below:
1) Borrower has no right to prepay the loan.
2) Borrower may prepay the loan only in its entirety, and without paying a premium.
3) Borrower may prepay the loan only in its entirety, but only upon paying a premium.
4) Borrower may prepay the loan either entirely or partially without paying a premium.
5) Borrower may prepay the loan either entirely or partially, but only upon paying a premium.
If the parties agree to a prepayment with a premium, the amount of the premium must be decided. It is very common to express the premium as a percentage of the unearned interest. Unearned interest is the interest that would otherwise have accrued on the prepaid portion of the principal had the loan been paid through full term.
For example, assume a note (not amortized) for $10,000 for 1 year at 10 percent interest. The interest that will be earned throughout the full term of this note equals $1000. If this note is paid in the 9th month, that means it is being prepaid 3 months early. Thus, 3 months of interest will not be earned, which in this case equals $250.00 (1000/12*3). Unless a prepayment premium is charged, the lender will lose the entire $250 of unearned interest that he/she otherwise expected to receive from the investment.
To calculate the prepayment premium, lets assume in this example that it is 20% of unearned interest. Thus, the premium would equal $50 (20% of $250). With this method of calculating prepayment premiums, the dollar amount of the prepayment premium decreases as the note gets closer to full term. Also, as you can tell from this example, equating the prepayment penalty to 100% of the unearned interest does not make sense because the borrower would not be saving any money by paying the note early and thus will have no incentive to pay the note early.
Calculating the prepayment penalty for partial prepayments on an installment loan is more complicated. If the parties desire to do this, then an amortization schedule must be used (which you can easily create using an online loan calculator) to calculate the unearned interest resulting from the partial prepayment.
Prepayment premiums may also be determined by using a preset amount, such as a lump sum amount or as unearned interest calculated at a preset number of days. Although these methods may make it easier for the borrower to know what the prepayment charge will be, they do not adjust with time. Thus, as time passes, the borrower's incentive to prepay the note will decrease. Depending on the term of the note and the prepayment amounts chosen, this could create undesired results.
NOTE: THE ALLOWS YOU TO CHOOSE ONLY A "PERCENTAGE OF UNEARNED INTEREST" AS THE PREPAYMENT PENALTY. IF YOU WANT TO SET THE PENALTY AT A FIXED DOLLAR AMOUNT, DO NOT USE THIS WEBSITE.
Finally, it is important to understand that if the note is accelerated by the lender because of a default by the borrower, and thus the borrower is forced to "prepay" the loan in full, the issue as to whether or not a prepayment charge is due arises. PLEASE NOTE THAT IF YOU PREPARE A PROMISSORY NOTE USING THIS WEBSITE, THE LENDER WILL NOT BE ALLOWED TO CHARGE A PREPAYMENT PREMIUM FOR ANY PREPAYMENT RESULTING FROM THE LENDER'S ACCELERATION OF THE NOTE.
|WHAT IS USURY?|
|The law imposes a maximum amount of interest that may be charged under
certain circumstances. When a lender charges interest in excess of these
limits, it is considered to be usury. In many cases, the maximum amount
that may be charged is 10%. There is a brief explanation of usury on the
Attorney General's website.
After reading this, you may be curious about the Federal Reserve Bank of San Francisco's rate charged to member banks. You can get information on that by clicking here.
NOTE: As you may have gathered from reading this material and visiting the links above, different situations allow for different interest rates to be charged. However, if you use the to prepare your promissory note, the maximum interest rate you may input is 10%. If you think you are allowed to use a higher interest rate, and/or want to use a higher interest rate, you should not use this website and should seek the advice of an attorney.
|THINGS TO CONSIDER|
| YOU SHOULD NOT USE THIS WEBSITE TO PREPARE A PROMISSORY NOTE FOR ANY
OF THE FOLLOWING:
It should not be used by any person (or business) who regularly offers or extends credit to consumers primarily for personal, family, or household purposes.
It should not be used for retail installment sales as defined by California Civil Code section 1802.5.
It should not be used for transactions involving real estate.
It should not be used for any transaction that requires the promissory note to refer to additional documentation.
IF YOU ARE NOT SURE WHETHER ANY OF THESE RESTRICTIONS APPLY TO YOU, DO NOT USE THIS WEBSITE.
By visiting and using this website, you agree to our Terms
The material above is NOT a complete explanation of the law regarding the form's subject matter -- it only provides specific legal information regarding the associated form. It is not intended to provide information outside the scope of the associated form. It is intended to explain only certain legal concepts in simple terms in order to help the reader understand what the form is for and how it's generally used.
Also, the above information is not legal advice. It is GENERAL legal information that merely states the law. If you need legal advice about your own particular situation, you must hire an attorney that can listen and apply the law to your specific facts. cannot and does not practice law and cannot help you with your individual problem.
Also, the foregoing information and the form related hereto pertain only to California law, unless indicated otherwise at the top of the corresponding . This website does not have information regarding federal law or the laws of other states.