A promissory note is a written document that formalizes a promise to pay someone.
If you want to lend or borrow money, you need a promissory note.
Purpose of Florida Promissory Notes
Florida promissory notes establish a clear, legally enforceable record of a loan and obligation to repay. Casually lending a small amount of money to a family member or friend does not typically require a promissory note.
However, if you are entering into a more sophisticated lending agreement or a large amount of money is involved, you should use a promissory note to protect your right to be repaid.
Types of Promissory Notes
Promissory notes go by a variety of different names, including IOU, loan agreement, promise to pay, personal note, or note. These are all ways of saying there is a legal obligation to repay a loan.
There are several types of loan agreements that a promissory note can memorialize.
Personal Promissory Note
A personal promissory note involves your typical loan agreements between family and friends. You may not think you need a promissory note if you trust the other party.
However, you may consider using one if you are borrowing or lending a large amount of money.
Investment Promissory Note
Investment promissory notes are a way for businesses to raise capital. These are sophisticated agreements that typically involve ownership interests in the company.
Real Estate Promissory Note
In a real estate promissory note, real property is used as collateral to secure a loan. If the borrower fails to repay the loan, the lender can place a lien on the property.
Commercial Promissory Note
Commercial promissory notes are used when borrowing from a commercial lender, such as a bank. Often the lender imposes strict repayment requirements and will demand full repayment of the loan if the borrower defaults.
Secured and Unsecured Promissory Notes
A promissory note can be either secured or unsecured.
A secured promissory note in Florida includes some type of collateral (or asset) in the agreement. This means that in the event the borrower fails to repay the loan, the lender can take the asset to satisfy the loan amount.
For instance, a loan for the purchase of a house is often secured by a mortgage on the house, which is the collateral.
An unsecured promissory note in Florida has no underlying collateral. If the borrower defaults on the loan, the lender will have to take more drastic measures to be repaid, such as debt collection or legal action.
Florida Promissory Note Requirements
Legally binding Florida promissory notes must identify all parties, include the promise to pay, state the amount owed, and be signed by all parties.
There are many terms and details that a Florida promissory note may include, but they will vary based on the intent of the parties. Generally, Florida promissory notes include the following:
- Names and contact information of all parties to the agreement;
- A statement of the promise to pay;
- Amount of the loan;
- Collateral used to secure the loan, if any;
- Repayment schedule (amounts, frequency) and interest;
- Date repayment is due;
- Penalties and late fees;
- Consequences of default;
- Governing state law; and
- Provisions for awarding attorney fees and costs.
All parties must sign the promissory note. Florida law does not require that the promissory note be notarized, but parties often take this extra step.
The loan repayment can be structured in different ways depending on how the lender wants to be repaid.
Installment promissory note
Under an installment promissory note, the borrower typically repays the loan in equal installments until the total amount is repaid.
Single promissory note
A single promissory note requires the borrower to repay the loan in one lump sum on a specific date.
Demand promissory note
A demand promissory note requires the borrower to repay the loan amount whenever the lender demands. Typically, the lender gives some sort of notice to the borrower.
Balloon promissory note
Under a balloon promissory note, the borrower remits smaller payments in the beginning of the loan term and then pays a large sum at the end, satisfying the loan.
Under Florida law, there is a cap on the amount of interest the lender can charge. For loans of less than $500,000, the maximum interest rate is 18%.
For loans over $500,000, the maximum interest rate is 25%. The limit on allowable interest is called the usury rate. Loans that have an interest in excess of the usury rate may be unenforceable.
When determining the final loan amount under a Florida promissory note, the lender should factor in the documentary stamp tax and the nonrecurring intangible tax, if applicable.
For every promissory note, Florida law imposes an excise tax called the documentary stamp tax. The current rate is $0.35 for every $100 loaned.
For promissory notes secured by real property in Florida, the Department of Revenue imposes a nonrecurring intangible tax at a rate of 2 mills.The tax owed is based on the value of the underlying real property.
Template Promissory Notes
There are plenty of Florida promissory note templates available online. Templates can be a good starting point because they often include standard language that covers the basic terms of a promissory note.
Unfortunately, boilerplate language may not reflect your true intent, and important terms may be omitted from the template. An attorney can draft or review a promissory note to ensure that it memorializes your intentions and protects your interests. It is especially important to hire an attorney if you are borrowing or lending a large amount of money.
Understanding Florida law regarding interest caps and applicable taxes is another reason to have a lawyer draft your promissory note. At BrewerLong, our team of experienced contract attorneys know the intricacies of Florida’s laws and can create a comprehensive promissory note to meet your needs.
How to Collect on a Promissory Note
If the borrower fails to repay the loan, it is important to know what action the lender can take.
First, the lender can ask for repayment in writing (e.g. past due notices).
Second, the lender may discuss payment options with the borrower, such as partial repayment or an extended repayment plan.
Third, the lender may hire a debt collector or sell the promissory note to a debt collection agency.
Fourth, the lender could sue the borrower for breach of contract.
Florida has a five-year statute of limitations for the lender to seek repayment of a promissory note. The five-year clock starts on the date of default (i.e. the first late payment).
However, there are some exceptions that will pause or delay the start of the clock, such as if the borrower makes a partial repayment of the loan.
Contact Us Today
At BrewerLong, our attorneys have years of experience drafting promissory notes that protect your interests. Contact BrewerLong today to discuss your contract needs.