Promissory Note

A promissory note is a written promise by one party (the borrower, or “maker”) to pay a specific sum of money to another party (the lender, or “payee”) under agreed-upon terms. It creates a legally enforceable obligation to repay the debt.

In Minnesota, promissory notes are governed by the Uniform Commercial Code Article 3 ( Minn. Stat. § 336.3-104 ) for negotiable instruments and by Minnesota’s usury statute ( Minn. Stat. § 334.01 ) which sets limits on interest rates.

When to Use This Template

• You are lending money to a friend, family member, or business associate and want a written record of the loan terms
• You are borrowing money and the lender requires a written promise to repay
• You are documenting a business loan, personal loan, or seller-financed sale
• You want to establish clear repayment terms including amount, interest rate, and payment schedule
• You need to document a loan for tax purposes (the IRS may recharacterize interest-free loans between family members)

How to Use This Template

1. Download the template in your preferred format (PDF or DOCX).
2. Fill in the date the promissory note is executed.
3. Fill in the borrower’s (maker’s) full legal name and address.
4. Fill in the lender’s (payee’s) full legal name and address.
5. State the principal amount — the total amount being borrowed.
6. Set the interest rate. Review Minnesota’s usury limits below before setting a rate. If no interest is charged, state “0%” explicitly.
7. Specify the repayment terms: lump sum by a specific date, monthly installments, or on demand.
8. Include any late payment provisions — a grace period and late fee amount.
9. Specify whether the note is secured or unsecured. If secured, describe the collateral.
10. Both parties sign and date the document. The borrower’s signature is essential; the lender’s signature is recommended but not required.

Minnesota Interest Rate Limits

Minnesota law limits the interest rates that can be charged on loans. Exceeding these limits constitutes usury, which can void the interest portion of the loan.

General usury limit: 8% per year for loans where no rate is specified or agreed upon ( Minn. Stat. § 334.01 ).

Contract rate: Parties may agree in writing to a higher rate, but certain types of loans have caps:

• Loans under $100,000 to individuals: The maximum contract rate is generally tied to prevailing market rates. Excessively high rates may be found unconscionable by a court.
• Business and commercial loans of $100,000 or more: No usury cap applies ( Minn. Stat. § 334.011 ).
• Loans secured by a mortgage on residential real property: Subject to separate consumer protection statutes.

Types of Promissory Notes

Demand Note

The lender can demand full repayment at any time. No fixed repayment schedule. Minnesota law requires reasonable notice before demanding payment on a demand note ( Minn. Stat. § 336.3-108 ).

Installment Note

The borrower makes regular payments (usually monthly) of principal and interest over a set period. The template should specify the payment amount, due date, and total number of payments.

Lump Sum Note

The borrower repays the entire principal plus accrued interest in a single payment on a specified date.

Secured Note

The loan is backed by collateral (e.g., a vehicle, equipment, or other property). If the borrower defaults, the lender may seize the collateral. A secured promissory note should be accompanied by a separate security agreement, and the lender should perfect their security interest by filing a UCC financing statement ( Minn. Stat. § 336.9-310 ).

Unsecured Note

The loan is based solely on the borrower’s promise to pay. If the borrower defaults, the lender’s remedy is to sue for the unpaid amount.

Key Terms to Include

A complete promissory note should include:

• Principal amount — the total amount being borrowed
• Interest rate — annual percentage rate (APR), or explicitly state “0% interest”
• Repayment schedule — when and how payments are due
• Maturity date — when the full balance must be repaid
• Late payment terms — grace period and late fee amount
• Prepayment — whether the borrower can pay early without penalty
• Default provisions — what constitutes default and the lender’s remedies
• Acceleration clause — whether the full balance becomes due if the borrower misses a payment
• Governing law — “This note shall be governed by the laws of the State of Minnesota”
• Signatures — at minimum, the borrower must sign

Common Mistakes to Avoid

1. Not putting the agreement in writing. Oral promises to repay are difficult to enforce and create disputes about the terms. Always use a written note.
2. Charging excessive interest. Review Minnesota’s usury statute ( Minn. Stat. § 334.01 ) before setting an interest rate.
3. Vague repayment terms. “Pay me back when you can” is not enforceable the same way as “Pay $500 per month on the 1st of each month beginning April 1, 2025.”
4. Failing to specify what happens on default. Without default provisions, the lender may have to file a lawsuit to recover the balance.
5. Not dating the note. The date establishes when the repayment obligation begins and affects statute of limitations calculations.
6. Confusing a promissory note with a loan agreement. A promissory note is the borrower’s promise to pay. A loan agreement is a broader contract that may include covenants, representations, and conditions. For complex transactions, you may need both.

Statute of Limitations

In Minnesota, the statute of limitations for enforcing a written promissory note is 6 years from the date the payment was due or the last payment was made ( Minn. Stat. § 541.05 ). After 6 years, the lender may lose the right to sue for collection.

For demand notes, the 6-year period begins when the lender makes a demand for payment, or 10 years after the date of the note if no demand is made.

Tax Considerations

• Interest income: The lender must report interest received as income on their tax return.
• Below-market loans: If you lend money to a family member at below-market interest rates (or interest-free), the IRS may impute interest under IRC § 7872. This means the IRS treats the lender as if they received interest income even if they did not. The applicable federal rate (AFR) is published monthly by the IRS.
• Bad debt deduction: If the borrower defaults and the debt becomes uncollectible, the lender may be able to claim a nonbusiness bad debt deduction as a short-term capital loss.

Related Resources

Small Claims Court (Conciliation Court) in Minnesota

• Minnesota Revisor of Statutes — Chapter 334 (Interest and Usury) — Minnesota usury limits
• Minnesota Revisor of Statutes — Chapter 336, Article 3 (Negotiable Instruments) — UCC Article 3