California Promissory Note

When do you need a Promissory Note?

Use a Promissory Note when: you lend money to a family member (even a child or sibling), lend money to a friend or acquaintance, your business lends money to another business or to an employee, you receive money in exchange for paying it back later (loan from debtor side), you are closing a sale where buyer will pay in installments, or you need to formalize an existing undocumented debt. WITHOUT A PROMISSORY NOTE, California courts can consider the money a GIFT — and gifts do not have to be returned.

What is included?

• ✓Identification of lender and borrower
• ✓Exact loan amount
• ✓Interest rate (if any)
• ✓Payment schedule (monthly installments, lump sum, etc.)
• ✓Default and collection clause
• ✓Optional collateral clause
• ✓Bilingual English/Spanish

California loan rules

In California, private loans generally have a 10% annual interest cap under the California Constitution (Art. XV §1). Exceptions: home loans over $50,000, loans by licensed financial institutions, and loans not for personal use. If you charge over 10% without being in an exception, the loan is USURIOUS and you lose the right to collect ALL interest and possibly part of the principal. For real estate loans, you must use a Deed of Trust in addition to the Promissory Note.

How to draft an enforceable California Promissory Note

1. 1. Identify the parties preciselyBorrower: full legal name + address + ID number. Lender: same. If an entity, legal name + EIN + registered address.
2. 2. Specify the principal amountExact figure in dollars ("USD $25,000") and in words ("Twenty-five thousand US dollars"). No ambiguity — California courts reject notes with inconsistent figures.
3. 3. Define the interest rateCalifornia general usury limit = 10% annual. For commercial loans >$300k to entities, no limit. Specify: rate, whether fixed or variable, and how calculated (simple vs compound).
4. 4. Set payment scheduleEqual monthly installments (most common), balloon payment at end, or lump sum. Specify: amount of each installment, start date, date of each installment, and payment method.
5. 5. Default clauseWhat constitutes default? (typical: payment 30+ days late). What happens at default? (acceleration: entire balance due immediately, + late interest, + collection cost).
6. 6. Specify collateral if applicableSecured note: backed by asset (house, car, equipment). Unsecured note: only personal promise. Secured has more force but requires additional documentation (UCC-1 filing for personal property, deed of trust for real estate).
7. 7. Sign with witnesses or notarizationFor loans >$25k, we recommend notarization. For secured loans against real estate, notarization AND recordation at County Recorder is MANDATORY.

Common Promissory Note mistakes

• ⚠Exceeding usury limit (10% in California)For personal loans, a rate >10% annual is usury and the note is VOID. Exceptions: loans to business entities, certain licensed lenders.
• ⚠Ambiguity in amountIf numerical ($25,000) and written ("Twenty thousand") don't match, courts typically take the lesser — for borrower protection. Be consistent.
• ⚠Not including acceleration clauseWithout acceleration, if borrower defaults May installment, you can only sue for that installment — not the full balance. Expensive and slow.
• ⚠Forgetting attorney's fees clause"Borrower will pay reasonable attorney's fees if Lender must enforce this Note" can save thousands. Without this clause, each party pays their own fees (California default).
• ⚠Not notarizing large loansNotes without notarization are enforceable but more vulnerable to signature dispute. For loans >$10k, the $15-20 of notarization is cheap insurance.

Frequently Asked Questions

Other documents in this category

• Guardian DesignationNominate a guardian for your minor children.View details →
• General AffidavitFormal statement under oath.View details →
• Bill of SaleLegal proof of a sale transaction.View details →

You might also need

• General Power of AttorneyBroad financial authority for your agent.View details →
• Limited Power of AttorneyAuthority for ONE specific task.View details →