Promissory note
The written promise to repay a loan, on stated terms. What turns a family understanding into a loan anybody can act on.
What it means
A promissory note records the amount lent, the interest, the repayment schedule and what happens if a payment is missed. It is the document that answers, in writing, what the two sides agreed.
A note may be unsecured, or secured against property by a mortgage or deed of trust recorded with the county. A recorded loan is visible on a title search and has to be dealt with on a sale or a refinance; an unrecorded one is not, and the property can change hands without it ever surfacing.
Loans between family members at no interest or at a rate below the federal benchmark are treated specially under federal tax rules, which is a reason to have the terms looked at before the money moves.
Why it matters
Without one, whether the money was a gift or a loan is decided years later by whichever recollection is more confident, usually at a divorce, a sale or a death.
When the lender dies, the note is an asset of their estate, and unless the will forgives it the executor is expected to collect it from a family member.
When you are likely to meet it
- When a parent lends toward a home purchase.
- When an executor finds a family loan in the estate's assets.
- When a mortgage lender asks whether the money has to be repaid.
How this varies by state
Formalities for securing a note against real property, and recording it, are set by state law and by the county.