What to know
Promissory note or loan agreement?
A promissory note is a borrower's written promise to repay a specific amount on stated terms. It is short and works well for straightforward personal loans. A loan agreement is more detailed and binds both sides, with terms on conditions for funding, borrower promises, events of default and remedies. Business loans and larger personal loans often use a loan agreement together with a note.
Interest and repayment
State usury laws cap the interest rate that can be charged on many kinds of loans, and the caps vary widely. Charging more than the limit can carry penalties, so check your state's rules before setting a rate. For loans between family members, the IRS publishes minimum interest rates, and charging less than those rates on larger loans can have tax consequences.
Decide whether payments will be made in installments, interest-only with a final balloon payment, or in a single lump sum. Our amortization calculator shows how each payment splits between principal and interest.
Securing the loan
A secured loan is backed by collateral, such as a vehicle, equipment or real estate, that the lender can claim on default. Real estate is usually secured with a mortgage or deed of trust that is recorded with the county. A personal guarantee adds a second person who promises to pay if the borrower does not.
When payments stop
Start with a friendly reminder. If that fails, a written demand letter sets a deadline and explains what will happen next. Sometimes the practical answer is a debt settlement agreement, where the lender accepts a reduced amount or a new payment plan in exchange for releasing the rest. When the debt is fully paid, a release or satisfaction document confirms it.
Keep a payment record
Whether you are the lender or the borrower, record every payment with the date, amount and remaining balance. Written receipts or bank transfers are better than cash without a receipt. A clear payment history prevents disagreements about what is still owed and supports any later enforcement or tax reporting.