7 Common Mistakes to Avoid When Drafting a Promissory Note
We all know that lending money or taking out a loan is a serious matter. Whether you are lending money to a friend, family member, or conducting business with a creditor, a well-drafted Promissory Note is crucial for protecting your interests.
Making mistakes in the drafting process can have significant consequences. These mistakes can lead to confusion, disputes, and even result in the Promissory Note being unenforceable. To avoid these pitfalls, it is important to understand the common mistakes that can occur and take steps to avoid them.
1. Lack of Clarity in Terms
One of the biggest mistakes that can be made when drafting a Promissory Note is failing to clearly define the terms of the loan. It is essential to clearly state the loan amount, interest rate, and repayment terms. Without clear and precise language, confusion can arise, leading to disputes between the borrower and lender.
Vague or ambiguous language in the Promissory Note can create challenges in interpreting the agreement. For example, if the repayment terms are not clearly defined, one party may claim that the loan is due immediately while the other party believes it is repayable over a longer period of time. This lack of clarity can lead to unnecessary legal battles that could have been easily avoided with a well-drafted Promissory Note.
There are two common types of Promissory Notes and you should know which you are writing: a Fixed Term loan and an On-Demand Loan.
Fixed Term Loans
A fixed-term loan has a specific repayment schedule, where the borrower agrees to make regular payments over a predetermined period of time until the loan is fully repaid. The repayment terms, including the frequency of payments and the amount to be paid each time, should be clearly outlined in the Promissory Note. This provides certainty and avoids confusion regarding the repayment schedule.
On-Demand Loans
An on-demand loan allows the lender to demand repayment of the entire loan amount at any time, without the fixed repayment schedule associated with a fixed-term loan. While this type of loan offers flexibility for the lender, it is important to clearly specify the conditions under which the lender can exercise this right to demand repayment.
Prescribed Rate Loans
Prescribed rate loans are a type of on-demand loan in Canada that meets the CRA's requirements for low-interest loans to family members. Prescribed rate loans pay interest once a year. The principal itself is payed on-demand.
2. Incorrect or Incomplete Information
In addition to clarity in terms, it is essential to provide accurate and complete information about both the borrower and the lender in the Promissory Note. This includes full legal names, addresses, and contact information. Any misspelling or omission of critical information can cause significant issues when it comes to enforcing the note.
3. Essential Terms
When drafting a Promissory Note, it is crucial to include all essential terms related to the loan agreement. These terms provide clear guidelines for both the borrower and the lender and help prevent misunderstandings or disputes in the future.
Some key elements that should be included in a Promissory Note are as follows:
- Governing Law: Every loan should specify the jurisdiction whose laws will apply if there is a dispute. Most lawyers who use LegalDeeds to write promissory notes set their home province as the governing law.
- Interest Rate: You must mention the interest rate of the loan even if it is zero-percent.
- Cosigners: Whether someone else is responsible for the loan if the borrower defaults.
- Payment Schedule: Fixed term loans should clearly outline the dates and amounts of each payment.
- Late Fees: Fixed term loans can charge late fees as a consequence for late payments.
Failure to include these essential terms can leave the parties vulnerable to uncertainties and disputes. It is crucial to work with a well-drafted and comprehensive Promissory Note template that covers all these crucial elements to protect both the borrower and the lender.
LegalDeeds can write your Promissory Note for only $5, ensuring your loan agreement includes all the essential terms.
4. Ignoring Applicable Laws and Regulations
Common legal requirements that should be considered include usury laws, which govern the maximum interest rate that can be charged on a loan, and disclosure obligations, which require information about the loan be provided to the borrowers. Failing to comply with these laws can have serious consequences, including rendering the Promissory Note unenforceable or subjecting the lender to penalties.
The 2023 Federal Budget announced the maximum APR (interest rate) on a loan is 35% as of June 2023.
5. Failure to Consider Future Contingencies
When drafting a Promissory Note, it is important to consider potential future scenarios and include provisions that address these contingencies. Failing to account for these contingencies can lead to complications and disagreements later on.
For example, it is prudent to include provisions for who pays legal expenses to enforce a loan the borrower does not pay. By including these provisions in the Promissory Note, both parties can have clear guidance on how to handle such situations, reducing the potential for confusion or disputes.
LegalDeeds writes Promissory Notes online since 1999. Here is an example of a clause LegalDeeds includes to require the borrower pays the lender's legal fees in the event the borrower defaults on the loan:
The Borrower is liable for all costs, expenditures, and expenses including, without limitation, all legal expenses the Lender incurs enforcing this promissory note in the event of a default by the Borrower.
6. Insufficient Documentation and Signatures
The borrower and any co-signers must sign the Promissory Note.
The lender does not need to sign the promissory note. However, the lender should take care to document every payment they receive from the loan. The lender will need proof a loan was not fully paid off if the borrower defaults on the loan.
7. Relying on Generic Templates
It is crucial to avoid the temptation of using generic Promissory Note templates that do not take into account the specific requirements of your situation. While generic templates may seem convenient, they often lack the customization necessary to address individual circumstances.
Each loan agreement is unique, and it is important to tailor the terms of the Promissory Note to fit your specific needs. By using a customizable Promissory Note software, such as those available on LegalDeeds.com, you can ensure that the terms of the loan are accurately reflected in the document for only $5.
Generic templates may not cover crucial elements or considerations relevant to your loan agreement, which can lead to complications in the future. By utilizing a document writing service, you can be confident that your Promissory Note is comprehensive, accurate, and legally sound.
At LegalDeeds.com, we provide customized Promissory Note documents that are specifically designed for use in Canada. Our website is easy to use and guides you through the steps to write your own legal loan agreement for $5. LegalDeeds includes all essential terms and satisfies the loan's legal requirements, then emails your completed document in PDF format.
Final Word
In order to protect your interests when lending or borrowing money, it is crucial to carefully draft a well-crafted Promissory Note. By avoiding common mistakes such as lack of clarity in terms, incomplete or incorrect information, failure to include essential terms, ignoring applicable laws and regulations, failure to consider future contingencies, and insufficient documentation and signatures, you can create a legally sound agreement that minimizes the risk of disputes or complications.
Visit LegalDeeds.com to write your own Promissory Note without a lawyer. LegalDeeds is A+ accredited with the BBB and has provided software to write legal documents since 1999.
You can write a legally binding loan agreement for only five dollars! Do not leave your loan agreement to chance. Take the necessary steps to write a legally sound document with LegalDeeds.