Negotiate better interest rates or repayment terms when you borrow from family or friends. Promissory notes let you buy the things you want or need, without going through a bank or credit union. Using a financial institution to get a loan may not be your best or only option, especially if someone you know is willing to lend to you on more favourable terms.
Borrowing without the bother of formal lending rules and regulations frees you to work out interest rates, lending terms or collateral that fit your own situation. Putting the loan terms in writing and understanding what they mean are important to protecting yourself and the lender legally.
Axess Law's Ontario business lawyers help you tailor informal loan terms to make lending effortless. We make drafting promissory notes easy and affordable, just $129.99. Our Greater Toronto Area lawyers can draft a promissory note in Ontario from anywhere in the province, via a video conference call.
What is a Promissory Note?
Promissory notes are legal documents that give your commitment to repay money you borrowed informally, without benefit of a bank, credit union or payday lender. They can give you access to temporary cash or come due when assets like a home or car are sold. You and the lender set the terms, subject to the federal Bills of Exchange Act and law where the promissory note is made. Anyone can make one. They are perfectly legal and fully enforceable when correctly drafted.
Promissory Note Examples
When you want to borrow money without offering security, such as buying equipment for a small business or purchasing a used vehicle, a promissory note can be the answer. The flexibility to borrow money without any assets or to use property traditional lending institutions would turn down make promissory notes a good alternative if your credit score is low.
Promissory Note Template
It may be an informal way to borrow, but promissory notes must be signed, clearly state how much was borrowed and make a legally binding promise to repay the lender. Features promissory notes should include are:
- principle and interest owing
- whether interest is fixed or floating and how it is calculated
- if the lender is a person, corporation or partnership
- when the note is due and how
- and penalties, if any, for late payments.
Most promissory notes have a firm due date. Demand promissory notes are repayable when the lender demands it, such as by putting their request in writing. You could negotiate installment payments, the easiest way to keep payments on track. Or you might make regular interest payments, followed by a final "balloon" payment that covers the principle.
The lender can charge interest, but it must be legal. That means less than 60% annually. Anything else is called a criminal rate of interest and can be overturned in court. Axess Law's business lawyers can file a court petition if you think the interest you are being charged is excessive.
Promissory Note Pros and Cons
Promissory notes have their pros and cons. Let's look at some examples:
Making equal monthly installments to repay a promissory note is like any revolving credit card debt. You agree on the interest rate and pay back principle and interest on time. While installment payments are convenient and more affordable if finances are tight, interest charges can be higher. You may be asked for a downpayment or security to ensure the note is repaid.
When you are expecting a guaranteed pay off, such a house sale to close or are waiting on a traditional bank loan, a balloon payment can get you cash when you need it. You could pay back the full amount all at once or make smaller installments and one final payment to cover the balance. Interest rates are typically lower and borrowing periods shorter. Beware: balloon payments can backfire if assets, like stocks, you are using to secure it lose value or refinancing you are counting on to pay off the note falls through.
Due By Note
Lending a friend money to buy hockey tickets is a good use of a due by a certain date note. Small loans with a set repayment date require less effort to enforce, but cause more stress if the borrower asks to renegotiate the due date. Axess Law can write to the borrower if they don't repay on time or help you take legal action in Ontario Small Claims Court.
Due on Demand Note
When your buddy needs more flexibility, due on demand notes allow borrowers to make payments when they can afford it. For example, when they collect unpaid wages or a court settlement. If you trust the borrower, you might even waive interest payments. You could be sorely disappointed if the borrower takes too long or defaults, but that's a risk you take with due on demand promissory notes.
Collecting on Promissory Notes in Ontario
Promissory notes can be enforced like any legal contract. You can even make a claim after the borrower dies, just by informing the deceased's estate trustee or court appointed representative (if they die intestate without a Will). You must file a claim by the limitation period, typically two years to the day the note was issued or when you first become aware they don't intend to repay you. Axess Law can advise you on what the limitation period is based on the terms of your promissory note and how to collect on a bad debt.
Collecting if the Borrower Defaults
If the borrower is avoiding your calls and letters, you may want to hire a fraud recovery expert. Instead of you doing all the work, which can be time consuming and costly (especially if the borrower skips town), an expert can track down the debtor and demand repayment. You pay an hourly retainer for their services or you might be able to negotiate to pay after your funds are recovered. Axess Law can connect you with fraud recovery lawyers and investigators to pursue unpaid debts and obligations.
Why Do I Need a Lawyer?
Your intentions may be good, but legal advice can help you sidestep potential problems before you lend money to family or friends. Axess Law's virtual business lawyers draft promissory notes that are enforceable and legally binding. We make remote video calls 7 days a week, day or evening, to discuss what to include in your note or how to collect on overdue payments. Or you can meet with us in person at our Greater Toronto Area law offices near you.