A promissory note for a family loan
A promissory note is a written promise to repay money. For a loan between family or friends, it sets out how much was lent, how it will be paid back and what happens if a payment is late, so nobody has to rely on memory.
What the note should include
- The names of the person lending and the person borrowing.
- The amount and the date the money is handed over.
- A sentence saying the money is a loan, not a gift.
- The interest rate, or that there is no interest.
- When each payment is due and how much it is, with a payment table.
- What happens if a payment is late or payments stop.
- Whether the borrower can pay early, and that there is no penalty for doing so.
- Which state’s laws apply.
- Both signatures and the date.
Promissory note or loan agreement?
For a family loan, people use both words for the same kind of document: a signed promise to repay, with the details written out. Your agreement includes the borrower’s promise to pay.
Does it need a notary?
A notary confirms who signed, which can help if the note is ever questioned. You can add a notary section to your agreement if you want one. A mortgage or deed of trust against a home is a separate document from the note, with its own rules. The note alone doesn’t make the interest on a home loan tax-deductible: that needs a mortgage or deed of trust recorded with the county.
Why a note matters for taxes
The IRS treats money given without a real expectation of repayment as a gift. A signed note with a payment schedule, an interest rate and a record of payments is the usual evidence that money was a loan. IRS Publication 550 says: “If you lend money to a relative or friend with the understanding that it may not be repaid, it is considered a gift and not a loan.”
Questions
Is a handwritten note enough?
A handwritten note often leaves out the payment dates, interest and what happens if payments stop, which is where disagreements start.
Should both people sign?
Yes. The borrower’s signature is the promise to pay. The lender’s signature shows they agreed to the same terms.
Can we add a spouse?
Yes. You can add a second person on either side, and each signs.