A promissory note for a family loan is a short written promise, signed by the borrower, to repay a set amount on set terms. To write one, you fill in nine terms, from the names and the amount to the payment schedule and what happens after a missed payment. The borrower signs it, and the lender keeps the signed original.
That is the whole document. What makes it useful is that its numbers are complete and add up. A note that says "$30,000, to be repaid when possible" records a debt, but not a plan.
Quick answer: A promissory note states who borrows from whom, how much, at what interest rate, the installment, the number of payments, the first and last due dates, and what happens if a payment is missed. The borrower signs it, and so does a guarantor if there is one. The lender does not have to. Our free promissory note generator fills in the installments and dates for you.
What a promissory note is, and what it is not
The Uniform Commercial Code, the model law US states adopted for notes and checks, defines a promise as "a written undertaking to pay money signed by the person undertaking to pay" (UCC § 3-103). The person who signs is called the maker. In a family loan, that is the borrower: your daughter, your brother, the friend you are helping out.
That definition explains the shape of the document. A note is one-sided. It is the borrower's promise, so the borrower signs it. A loan agreement records the same loan as a contract you both sign, which leaves room for the lender's side of the deal, such as paying the money out in stages.
A note also does not keep track of anything. It records what was promised on the day it was signed. The payments that follow, the extra payment in March, the month that was skipped: none of that is in the note. For most families it ends up in a spreadsheet that drifts out of date, which is the problem Family Loan Tracker was built to solve.
The 9 terms of a promissory note for a family loan
These are the terms our generator writes into the note, in the order they appear. If you write the note yourself, use this as your checklist.
- The borrower and the lender. Full names and, ideally, addresses. Addresses matter later if a written notice ever has to be sent.
- The principal and the day it is paid out. The exact amount, and the date the money changes hands. Interest usually runs from that date.
- The interest rate, and how interest is calculated. Write the annual rate even if it is 0%, so nobody wonders later whether a blank meant zero. For a monthly loan, a common method is the annual rate divided by 12, applied to the balance at the start of each month.
- The installment. The amount due each period. It should be the amount that actually repays the loan by the last due date, not a round number that felt right.
- The number of payments, and the first and last due dates. "60 monthly payments, the first on December 16, 2026 and the last on November 16, 2031" leaves no room for two different memories of the same conversation.
- Where and how payments are made. A bank account, Zelle, a check in the mail. One line is enough.
- Prepayment. Whether the borrower can pay early without a penalty, and whether an extra payment shortens the loan or lowers the installments that follow.
- Late payments and default. Whether there is a late fee, and what happens when a payment is missed. A common setup is a written notice first, then a set number of days before the lender can call in the full balance.
- Signatures and the date. The borrower signs and dates the note. A guarantor, if there is one, signs too. If you know which state's law should apply, name it.
Two optional terms come up often: security, where the loan is backed by a house or a car, and a guarantor who promises to pay if the borrower does not. Security on real estate is usually set up in a separate document, such as a mortgage or deed of trust, so the note alone does not do that job.
Create your promissory note for free →
A worked example: $30,000 from parents to their daughter
Say Linda and Mark lend their daughter Emma $30,000 toward a car and the cost of moving for a new job. They agree on five years of monthly payments at 5.25%. This is what the filled-in note says:
| Term | What the note states |
|---|---|
| Borrower | Emma Carter |
| Lender | Linda and Mark Carter |
| Principal | $30,000.00, paid out on November 16, 2026 |
| Interest | 5.25% per year; each month, the annual rate divided by 12 on the balance at the start of that month |
| Installment | $569.58 per month |
| Payments | 60, the first on December 16, 2026 and the last on November 16, 2031 |
| Prepayment | Allowed at any time without penalty; extra payments shorten the loan |
| Late payment | No late fee; a written notice, then 30 days before the full balance can be called in |
| Signatures | Emma signs. Linda and Mark keep the original |
Over the five years, Emma pays $4,174.80 in interest on top of the $30,000. The last installment comes out a cent different from the others because of rounding. A calculated schedule handles that; a hand-typed one usually does not. You can check any schedule like this one with the amortization schedule calculator.
Why 5.25%? In this example it is simply the rate the family agreed on. For scale: the IRS mid-term Applicable Federal Rate for November 2026, which covers loans of over 3 and up to 9 years, is 5.08% (Rev. Rul. 2026-21). What that rate is used for is explained below.
Promissory note or loan agreement: which one fits your loan
Both documents record the same loan, and our generator writes either one from the same terms. The difference is who signs and what the document can hold.
| Promissory note | Loan agreement | |
|---|---|---|
| Who signs | The borrower, and a guarantor if there is one | The borrower and the lender |
| What it records | The borrower's promise to pay | What both of you commit to |
| A line of credit paid out in draws | Not a good fit | Yes: the lender commits to paying out the draws |
| Length | Shorter | Longer |
For a single amount paid out once and repaid on a schedule, a promissory note covers everything that needs to be written down. The loan agreement generator is the better fit when the money is paid out in stages, or when you both want your signatures on the same page. For a large or secured loan, have a lawyer review whichever document you use before anyone signs. Our family loan agreement guide walks through the agreement side in more depth.
Signing: witnesses, notaries and electronic signatures
The borrower signs and dates the note, and a guarantor signs as well. Whether you also need a witness or a notary depends on your state and on what the note is for. A note backed by real estate, for example, usually comes with a mortgage or deed of trust, and recording that document with the county typically requires a notarized signature. Our article on whether a family loan needs to be notarized goes through the situations where it comes up.
Electronic signatures deserve a moment of caution. The federal E-SIGN Act, which allows most contracts to be signed electronically, excludes most of the Uniform Commercial Code, including Article 3, the part that covers notes (15 U.S.C. § 7003). Whether an e-signed note works for your loan depends on the kind of note and on your state's law. A signed paper original is the simplest thing to keep in a drawer.
The interest rate and the IRS
In the US, the IRS publishes the Applicable Federal Rates every month. Under the below-market loan rules in 26 U.S.C. § 7872, a loan between individuals that charges less than the applicable rate can be treated as a gift loan, with the forgone interest treated as if it passed from lender to borrower. Gift loans between individuals of $10,000 or less are generally exempt, unless the money goes toward income-producing assets, and loans of $100,000 or less have a limit on the income-tax side.
The note does not change any of that. It states whatever rate the two of you agreed on. You can look up the rate for the month your loan starts in our AFR rates by month, and the family loan tax guide covers the rules at more length. A tax advisor can tell you how they apply to your loan.
After the note is signed
The lender keeps the signed original and the borrower keeps a copy. Store a scan with your other financial records.
Then the note's real work starts: the payments. Record each one with its date and amount, including the late ones, the early ones and the ones bigger than the installment. When the last payment is in, the traditional way to close a note is to mark it "paid in full", sign and date that, and give the original back to the borrower. For notes covered by UCC Article 3, returning or destroying the note is one of the ways the obligation can be discharged (UCC § 3-604).
If you would rather not keep that record in a spreadsheet, track the loan for free in Family Loan Tracker. The schedule from the note carries over, you both see the same balance, and every payment you record updates it.
Five gaps that make a homemade note hard to rely on
- "To be repaid when possible." No schedule and no last date. That is an IOU with a signature on it.
- A blank interest rate. If the loan is interest-free, write 0%.
- An installment that does not add up. Paying $500 a month on $30,000 at 5.25% does not repay the loan in five years. After 60 payments, $4,762.14 is still owed.
- No payout date. Without it, nobody knows when interest started.
- Changes agreed over the phone. If you change the rate or the schedule later, write the change down and have the borrower sign it, or sign a new note.
This is general information, not tax or legal advice. A tax professional or a lawyer can tell you how it applies to your situation.
