What is Promissory Note?
A Promissory Note is a legal document that has a promise to repay a personal loan, the amount of the loan, and the terms of repayment. If you are thinking of starting a small business and are not getting a bank loan, you may think of borrowing that money from a friend or a family member. If you do so, make sure you draw up and sign a Promissory Note. In case of an untoward incident like the business failing, you may not be able to pay. Defaulting on a loan is not good for the credit score. Therefore, a Promissory Note is imperative.
A Promissory Note is legal proof that a loan has been taken. This means that if the loan amount is not paid it is subject to litigation. The Promissory Note can be produced in a court of law to prove that the loan, in fact, has been taken. The amount of the loan must be clearly mentioned in it and the repayment terms, like interest, etc.
Promissory Notes Schedule Document
A Promissory Note also makes taking and giving a loan much less personal. The moment you document the loan everything is recorded. Neither party has to depend on memory or conversations about the loan. This way there is reduced chance of disagreement between friends and family. If you have a small business and the loan was for the purpose of investment, the Promissory Note will clearly state that you intend to repay the loan. The lender has no claim to your business.
A Promissory Note will also clearly outline a repayment schedule. It will clearly say whether the loan is to be paid once in full or be spread over months or years. It will also include interest accrued on the loan amount, if any. This always helps so that both parties are clear about how and in what denominations the loan will be repaid.
On the loan amount will depend taxes accrued on it. If there are no taxes for the amount bracket, well and good! If the loan amount exceeds $14,000, the person taking the loan is liable to pay a gift tax on the loan. If there is interest charged on the personal loan then the gift tax can be avoided. A Promissory Note can prove that the personal loan is a loan and not a gift.
If you have lent an amount of money to a friend or a family member, make sure to draw up and sign a Promissory Note so that the borrower cannot go back on his/her promise of repaying the money. They will have to repay it eventually. In case, of litigation a Promissory Note will come in handy. You can also avoid a gift tax by citing an interest on the loan amount that is in accordance with Internal Revenue Service’s latest applicable federal rate of interest. Consult a lawyer that can help you draw up the details of the Promissory Note. This way there will be no loopholes in it.
Promissory Note Document Template
