The short version
- A promissory note is a one-sided promise signed only by the borrower. A loan agreement is a bilateral contract, and it is the only one of the two that can carry conditions, covenants and lender obligations.
- Under UCC § 3-108, a note that "does not state any time of payment" is payable on demand — and § 3-118 then bars enforcement once neither principal nor interest has been paid for a continuous period of ten years.
- Making a note "subject to" a loan agreement destroys its negotiability. Referring to that agreement only for collateral, prepayment or acceleration does not.
- A security interest attaches when value is given, the borrower has rights in the collateral and has signed a security agreement describing it. Perfection — usually a filed financing statement — is a separate step, and without it the lender ranks behind later lien creditors.
Two documents, and only one of them is an instrument
A promissory note is a written promise by one person to pay another. Only the borrower signs it. A loan agreement is a contract: both sides sign, and both take on obligations — the lender to advance the money, the borrower to repay it on terms. Both are enforceable, and the difference that actually matters is not the number of pages. It is that a note drafted to the right specification is a negotiable instrument governed by Article 3 of the Uniform Commercial Code, and a loan agreement can never be one.
What each document can hold
Only a note
- An unconditional promise, signed by the borrower alone
- Words of negotiability — payable "to order" or to bearer
- Transferable by endorsement and delivery
Both must have
- The parties, the date and the principal
- The interest rate, or an express statement there is none
- When repayment falls due
- What counts as default
Only an agreement
- Conditions precedent and drawdown mechanics
- Covenants — reporting, negative pledge, further debt
- Representations and warranties
- Obligations running the other way, on the lender
Negotiability is the thing a note has and an agreement does not
UCC § 3-104(a) sets the specification. A negotiable instrument is an unconditional promise to pay a fixed amount of money that is "payable to bearer or to order at the time it is issued", "payable on demand or at a definite time", and that "does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money". That last requirement is the constraint people trip over: the moment the document asks the borrower to do anything other than pay money, it stops being an instrument.
Section 3-106(a) supplies the sharpest edge. A promise is not unconditional if it states an express condition to payment, or "that the promise or order is subject to or governed by another record", or that rights under it "are stated in another record". But § 3-106(b) says a promise is not made conditional merely by "a reference to another record for a statement of rights with respect to collateral, prepayment, or acceleration".
Why does it matter? Because negotiability makes the note portable and quick to sue on. It can be transferred by endorsement and delivery, and a transferee who qualifies as a holder in due course takes it free of the ordinary contract defences the borrower could have raised against the original lender — failure of consideration, breach, setoff. Only a narrow set of "real" defences survives, such as incapacity, duress and discharge in insolvency. And in an action on a note, producing the instrument and proving entitlement to enforce it is a considerably shorter road than proving a contract from scratch.
Demand or definite date: the same money, a completely different clock
This is where informal notes fail most often, and the failure is silent. Under UCC § 3-108(a) a promise is payable on demand if it says so — or if it "does not state any time of payment". Leaving the date out is not neutral. It creates a demand note, and demand notes run on a different limitation rule from every other kind.
Where the limitation clock starts
Does the note state a time for payment?
No — so it is payable on demand
Six years run from the demand, so the clock does not start until the lender asks. But if no demand is made, enforcement is barred once neither principal nor interest has been paid for a continuous period of ten years.
Yes — a fixed date or a schedule
Six years run from the due date stated in the note, or from the accelerated due date where the lender has accelerated. Each instalment carries its own date until acceleration collapses them into one.
A demand note feels like the safer instrument to a private lender, because the money can be called at any time. The ten-year bar in § 3-118(b) is what makes it dangerous. A note lent to a relative or a founder, never formally demanded and never paid, quietly expires — and it expires while both parties still believe the arrangement is alive. If a loan has no schedule, the cheapest protection is a written demand, or a signed debt acknowledgment recording the balance as at a date, long before year ten.
Acceleration works the other way. Section 3-108(b) confirms that a right of acceleration does not stop a note being payable at a definite time, and § 3-118(a) then runs six years from the accelerated due date. Accelerating is therefore a decision with a deadline attached: it converts the whole balance into one claim, and starts one clock over it. Note too that Article 3 governs negotiable notes. A non-negotiable note, or a loan agreement, runs on your state's general contract limitation period instead — which is a different number, set state by state.
Promissory note template
Full text free to read and copy — the "for value received" promise, principal in figures and words, interest, schedule, late charges, prepayment, default and acceleration, with the payable-to-order wording already in place.
"Secured" is a word until somebody files
A note that says it is secured by the borrower's equipment, and says nothing else, secures nothing useful. Taking security is two separate steps, and collapsing them is one of the most expensive mistakes in private lending.
The first is attachment, which makes the interest enforceable against the borrower. UCC § 9-203(b) requires three things: value has been given, the debtor "has rights in the collateral or the power to transfer rights in the collateral", and the debtor "has authenticated a security agreement that provides a description of the collateral". The second is perfection, which makes it good against everybody else — normally a financing statement filed in the correct state office, possession or control for some kinds of collateral, and, for real property, a mortgage or deed of trust recorded in the county land records under state law rather than under Article 9 at all.
How much a security claim is actually worth
- Nothing, and worth about that
A sentence in the note saying it is secured
No collateral description, no granting language, nothing signed as a security agreement. It is a statement of intention.
- A page, and care over the description
A signed security agreement describing the collateral
Attachment. The interest is now enforceable against the borrower — and only against the borrower.
- A small filing fee
A financing statement filed in the right office
Perfection. Under § 9-317(a) an unperfected interest is subordinate to anyone who becomes a lien creditor first.
- Speed, and a search first
Filed before anyone else did
Competing perfected interests rank by time of filing or perfection, so the order of the queue is set on the day you file.
Attachment protects you from the borrower. Only perfection protects you from the borrower's other creditors, and that is the risk security was taken against.
Where a third party stands behind the loan instead of an asset, the mechanism is different again and belongs in its own document — see personal guarantees and the financial guarantee template.
Interest, and the cap you have to look up
There is no general federal usury ceiling. Maximum rates are set state by state, and the machinery has three moving parts worth understanding separately, because articles that print a table of rates go out of date within a year and tell you nothing about how the rule applies.
- The legal rate — what applies when a document is silent, or after a judgment. A note that omits an interest rate does not become interest-free by default in every state; a statutory rate may fill the gap.
- The maximum contract rate — the highest rate the parties may agree. Many states set this separately from the legal rate, and several set a criminal usury rate above it as well.
- The exemptions — and these swallow a great deal of the rule. Loans above a stated size, loans to corporate borrowers, and loans by licensed lenders are commonly carved out. Federally chartered banks operate under preemption: 12 U.S.C. § 85 lets a national bank charge "interest at the rate allowed by the laws of the State, Territory, or District where the bank is located", which is why a card rate can lawfully exceed the cap in the state where the cardholder lives.
The consequence of getting it wrong varies more than the cap itself does, and it is the part to check first. In some states a usurious lender forfeits the interest. In others the instrument fails altogether: New York General Obligations Law § 5-511 provides that usurious notes, contracts and securities "shall be void", with a softer forfeiture-of-interest rule reserved for savings banks. Losing the interest and losing the principal are very different outcomes for a private lender, and which one applies is a question of state law that has to be answered before the rate is written into the document.
What each document needs to be enforceable
The minimum that makes each one stand up
- A note: the maker and the payee identified by full legal name, a fixed principal in figures and words, the interest rate or an express statement that there is none, when it is payable, and the maker's signature.
- Words of negotiability if you want a negotiable instrument — payable "to [Lender], or order" — and nothing that makes payment conditional on anything.
- "FOR VALUE RECEIVED" as the recital of consideration. Want of consideration remains a defence the maker can raise, but it is one of the ordinary defences cut off against a holder in due course.
- A loan agreement: the ordinary contract requirements — agreement, consideration, capacity, sufficient certainty — and signatures from both sides rather than one.
- A security agreement, separately, if there is collateral: granting language and a description of what is being taken, signed by the borrower.
- Neither document generally needs a witness or a notary to bind the parties. Where acknowledgment does become necessary is at the security end, because recording a mortgage or deed of trust is governed by state real-property law — the notarisation guide sets out when that bites.
Where the one-pager stops working
The line is not a dollar figure. It is the first condition. Because a note cannot state "any other undertaking" without ceasing to be an instrument, the arrangement needs a loan agreement the moment it involves money released in tranches against conditions, a covenant against further borrowing, financial reporting, a definition of default wider than a missed payment, or any obligation running back towards the lender.
The professional answer is often both. A loan agreement carries the covenants, the conditions and the remedies; a note sits alongside it, evidencing the debt in transferable form and referring to the agreement only for collateral, prepayment and acceleration. That structure is why the two documents so often turn up together and why treating them as alternatives is a slightly false framing. For loans within a family, where the tax characterisation matters more than the transferability, lending money to family covers the part this guide does not.
The test that actually decides it
If the whole arrangement fits in one sentence — this sum, repaid on this date, at this rate — a note is enough, and it will be easier to enforce than a contract. If any part of it begins with "provided that", "so long as" or "on condition that", the note has already stopped being the right document and the only question left is how thorough the agreement needs to be. And whichever you choose, state a payment date. Silence is not caution; it picks the demand note, and the demand note is the one with a clock nobody is watching.
Sources
General information, not legal advice. This guide explains how these documents and rules generally work. Law varies by jurisdiction and changes, and none of it is applied to your circumstances here. For anything consequential, consult a licensed attorney where you are.
Frequently asked
Is a promissory note legally enforceable without a witness or a notary?
Generally yes. A note binds the person who signed it, and Article 3 of the UCC sets out what a negotiable instrument must contain without requiring a witness or an acknowledgment. Notarisation becomes relevant at the security end: a mortgage or deed of trust securing the note is recorded under state real-property law, which usually does require acknowledgment. Check your own state before relying on either point.
What is the difference between a demand note and an instalment note?
An instalment note states dates for payment; a demand note is payable whenever the lender asks, and a note silent on timing counts as one. The consequence is the limitation clock. Six years run from a stated due date on an instalment note, but from the demand on a demand note — and where no demand is made, enforcement is barred once neither principal nor interest has been paid for ten continuous years.
How long do I have to sue on a promissory note?
For a negotiable note, UCC § 3-118 gives six years from the due date stated, or from the accelerated due date if the lender accelerated. For a demand note it is six years from the demand, subject to the ten-year no-payment bar. A note that is not negotiable, and a loan agreement, run instead on the general contract limitation period of the relevant state, which varies widely.
What does it take to make a promissory note secured?
Three things for attachment: value given, the borrower having rights in the collateral, and a signed security agreement describing that collateral. Then perfection, which is a separate step — usually filing a financing statement in the correct state office, or recording a mortgage for real property. Without perfection the lender is subordinate to anyone who becomes a lien creditor first, which is exactly the scenario security exists for.
Is there a maximum interest rate I can charge on a private loan?
Yes, and it is set by state law — there is no general federal ceiling. Most states distinguish a legal rate that applies when a document is silent from a maximum contract rate the parties may agree, with exemptions for large loans, corporate borrowers and licensed lenders. Check the consequence as well as the cap: some states take away the interest, others void the instrument entirely.