20+ FREE Unsecured Promissory Note Templates

Documentation is vital when lending money to people and businesses. A promissory note is an example of such documentation. It is a written promise by the debtor/borrower to pay back a specified amount and any applicable interest fees under defined terms of payment. Examples of payment terms include a predetermined deadline, interest rate, repayment schedule, and payment upon demand condition. 

Often, a debt is issued in exchange for the possession of an asset that is returned once the debt is paid. Such a loan is referred to as a secured loan. However, in some cases, creditors do not ask for an asset as security, thus ending up with unsecured loans. A promissory note is even more important when lending such unsecured loans. An unsecured promissory note is legally binding, thus adding a layer of security to the creditor. This is because should the debtor default on the unsecured loan, the creditor can file a lawsuit against them with the note as evidence of the existing loan and the debtor’s obligation to pay.   

This article educates on using promissory notes when lending short-term unsecured loans. It also guides lenders on how to utilize templates to create legally enforceable promissory notes. 

Did you know? 24% of small businesses use short-term loans such as personal loans and credit cards to finance their operations (Federal Reserve 2019). 

Given below are unsecured promissory note templates:

What is an Unsecured Promissory Note?

An unsecured promissory note is a legal document stating that one party (borrower) owes a specific amount of money to another party (lender) and promises to pay it back at a specified time in the future.

The debt is unsecured since there is no collateral or security in place to protect the creditor if the loan is not paid back in full. The lender will rely on the borrower’s credibility, creditworthiness, and ability to repay. Such a note is used to lend short-term small and personal loans due to the risk posed by unsecured loans. 

Lenders can use templates to make promissory notes. Templates are pre-drafted fillable documents with entries for all the necessary information and basic terms and conditions that should be included in a promissory note for unsecured loans. Typically, the document indicates the loan amount, interest rate, repayment schedule, and legal clauses. 

The template is written in legalese needed to make the note legally binding and compliant with applicable laws and regulations. However, it is advisable to have legal professionals review the completed note to ensure that the interests of both parties are protected. Templates are also advantageous because they can be modified to include specific needs and terms applicable to the specific situation. You can download these templates from our site for free and easily customize them to create a promissory note when lending unsecured loans. 

Types of Unsecured Promissory Notes: Long-Term Vs. Short-Term

Unsecured loans are categorized based on the length of the repayment duration and payment plan used. As a result of repayment duration, the debt can be short-term or long-term. Short-term debts are subjectively small amounts of money loans meant to be paid back within a short period, ideally less than a year. Such debts are typically lent to family and friends, and a note is used to formalize the agreement and lay out the applicable payment terms.

Long-term debt typically has a longer repayment duration, typically more than a year. Such debts will be issued to a business. A note legitimizes the agreement and offers assurance to the noteholder in such a transaction. 

In terms of the payment plan, an unsecured loan can be classified as installment payments, lump sum payments, and balloon payments:

• Installment payments infer to regular payout of portions of the loan, either weekly or monthly. Each portion is inclusive of the principal (money borrowed) plus interest. Installments are calculated such that the last installment clears the debt in its entirety. 
• Lump sum payment requires the borrower to pay the full debt at a specific date. The loan can also be payable on demand upon request rather than on a predetermined date. This payment plan is popular for short-term unsecured loans but may also be used on long-term debts. 
• Balloon payment combines installment and lump sum payment plans. With this method, partial payments of interest only and principal plus interest in some cases are made at regular intervals leaving a lump sum portion to be paid at the end of the debt duration. This approach has a pre-determined due date and is suitable for both short-term and long-term loans. 

You can create templates for the different types of unsecured loans to offer borrowers options or flexibility on what type of loan will suit their repayment ability. Also, this will ensure borrowers know the applicable payment terms before accepting the payment obligation. 

Using a template to create promissory notes for unsecured loans is more efficient as it eliminates the workload needed to create one from scratch. It outlines the information needed, allowing you to simply input the information as guided. 

Below is a thorough guide on how to fill the different sections of such a template:

The parties

Firstly, fill out your full name and mailing address. Also, write down the name and address of the borrower. Document this information in the sections with the appropriate titles “lender” and “borrower” accordingly. Also, fill out the date to ensure the note accurately records when the transaction took place. 

Loan terms

The template will have sections for recording the amount of money being lent (known as the principal), interest rate, and due date. Ensure to document the exact amount of the debt in dollar value or appropriate currency. Then, write the interest rate in percentage in the appropriate space. Also, specify the duration on which the interest is being compounded based on – this can be per month, annum, or any other. To complete this section of the template, indicate the exact date when the loan is expected to be paid back. Use the date-month-year format. 

Note: Most states and jurisdictions have usury laws limiting the amount of interest lenders can impose on loans. The lender is responsible for ensuring the interest charged on the unsecured loan complies with any applicable usury laws. 

Payments

Thirdly, fill out the payment plan agreed on with the borrower. Unsecured loans can be paid in lump sums or installments. If the lump sum approach is used, record the total amount (principal and interest) to be paid and the due date. If the installments method is used, write the amount (in dollars) to be paid as payment, the specific due date of the first payment, and the subsequent intervals in the designated entries. Intervals can be weekly, monthly, or quarterly. 

Due date

The template will also include a section to write the date of the final repayment of the unsecured loan. This date is inclusive of a predetermined grace period. The number of days applied as the grace period must thus be specified. 

Co-signer

A co-signer is a person who accepts joint responsibility for the debt of the borrower. They are liable and obligated to pay the loan should the debtor default. Fill out the co-signer’s name (if any) in the designated space within the declaration statement clarifying their role in the agreement. If no co-signer is involved in the transaction, select the “no co-signer” checkbox.    

Late fee

You can decide whether to impose late fees on the loan or not. If a late fee is charged, record the dollar amount that will be charged and the associated basis of calculation after the deadline passes. Late fees can be charged on an occurrence (after-the-fact) or daily basis. 

Security

The template will also have a statement specifying that the loan has been issued with no security or collateral to ensure it aligns with the loan terms. This statement is added to clarify that the debt is unsecured.  

Pre-payment penalty

Next, select the appropriate checkbox depending on whether the borrower will be charged fees should they decide to pay the loan prematurely to avoid paying cumulative interest. It is your responsibility to decide whether they will impose a prepayment penalty. If a penalty will be charged, specify whether it is a predetermined amount, interest on the pre-paid amount, or any other. 

Interest due in the event of default

Next, fill out the amount that will be charged as interest should the borrower default on any installment or full loan in the appropriate spaces. Specify the associated interest rate and whether it is compounded per month or annum. You are allowed to charge the maximum rate allowed by applicable laws. So, you can specify that the borrower will be charged either of the two, whichever is less or high as the borrower prefers. 

Allocation of payments

The template should also include a statement that declares how payments will be allocated or prioritized to amortize the debt. Typically, the order of priority used to allocate payments is as follows; late fees and interest due, followed by the principal. 

Acceleration

The promissory note can specify whether you can accelerate the debt and under what circumstances. Acceleration infers a request to pay back the debt immediately. Typically, you can accelerate the loan if the borrower fails to make payments, becomes bankrupt, passes away, or sells a high-value asset. So, write the number of days the borrower will have to clear the debt after you have issued a notice of default. 

Attorney’s fees and costs

The template will also include a statement to clarify that the debtor will be liable for any legal costs incurred in an effort to collect any money owed. This statement can be expanded to capture a situation where either you or the borrower sues the other party to pursue their rights under the promissory note. The statement should state that the at-fault party will seek reimbursement of any attorney’s fees incurred in the ensuing legal proceedings.  

Waiver of presentments

This clause clarifies that the borrower waives their right not to receive presentments for payment, a notice of dishonor, protest, and notice of protest. This means you do not have to issue demands or notices to request payment when due or defaulted.  

Non-waiver

This clause specifies that just because you may fail or delay exercising your rights under the promissory note, it does not imply that you have waived those rights. This means should you not notify the borrower of a late payment because you forgot, it does not imply that the applicable late fee stipulations of the note are not enforceable. 

Severability

A severability clause clarifies that any provision of the note deemed to be void or unenforceable does not invalidate the rest of the document. This guarantees that the note will remain legally enforceable even after a clause, loan term, or condition is proven unlawful or unenforceable under specific jurisdiction. So, review the clause to verify that it explicitly communicates the severability guidelines. 

Integration

The template will have a statement that clarifies that no other agreements, written or verbal, alter the stipulations or provisions of the promissory note of the unsecured note. This ensures that the note cannot be modified without the consent of both parties. 

Conflicting terms

This clause clarifies that the note will be the primary document guiding the transaction. It states that the note will be referenced if there are conflicting terms in other supporting documents. 

Notice

Then, include the notice clause, which outlines the appropriate procedure or guidelines for issuing notices whenever necessary to ensure it aligns with your specifications. The statement must indicate the type of notice (often written) and delivery method. It is important to use certified mail or courier services that provide proof of receipt or delivery. 

Execution

A statement that indicates the role each party will take in the execution of the promissory note is also included in the template. Ideally, you can be the principal or surety (executor or guarantor). The borrower and co-signer will jointly be liable for the repayment stipulations outlined in the note. Verify that this statement explicitly communicates each party’s role in the transaction.  

Governing law

The template will have a clause that states the jurisdiction under which the note will be enforced. Simply write the name of the state whose laws are being followed when lending the money in the provided bank space.  

Additional terms and conditions

The template also has a section to record any unique terms and conditions the lender and borrower have agreed on that did not appear in any other part of the template. You can carefully enlist them in the designated space.

Signatures

Lastly, the promissory note has to be signed to be legally binding. You, the borrower, and the cosigner (if any) must sign the respective entries as prompted by the template. Each party to the note must fill out their name, signature, and signing date. Signatures are proof that the signatories consented to the provisions of the note. 

Enforcing an Unsecured Promissory Note

Promissory notes are legally binding once signed by both parties. While there is no collateral to confiscate upon defaulting, you can file a lawsuit against the borrower or seek the services of a collection agency. 

However, verifying the borrower’s trustworthiness and financial ability to repay is always advisable before issuing them an unsecured loan. Also, be aware that there are no guarantees that the debt will be paid in full. It is also important to lend an unsecured debt while being aware of the risk of loss and additional fees should the debtor default. 

Promissory notes are quite useful when lending money without any security or collateral. It provides legal protection to the borrower and some assurance that the money can be recovered. The basic components of the note are the parties’ details, the amount owed, the due date, the payment plan, and other terms and conditions as agreed between the involved parties. You should be familiar with jurisdiction or governing laws to ensure the promissory note is legally enforceable. Also, consider using templates to create promissory notes, as they offer guidance and reduce the time and effort required for this purpose.