Key Takeaways

  • Defaulting on a promissory note occurs when a borrower fails to meet repayment terms, triggering legal and financial consequences.
  • A valid promissory note should include repayment terms, interest, default clauses, and remedies.
  • Lenders may issue a notice of default as a formal first step in resolving missed payments.
  • Secured promissory notes give lenders rights to repossess collateral upon default.
  • Borrowers can face lawsuits, damage to credit, or loss of secured property when defaulting.
  • Legal remedies for lenders may include demanding full payment, enforcing collateral seizure, or pursuing litigation.
  • Defenses to default include improper notice, ambiguous terms, or lender misconduct.
  • Working with an attorney can help protect your rights whether you're a borrower or a lender.

It's not wise to default on a promissory note. A promissory note, or promissory letter, is a legal instrument that provides the details of a contractual agreement between two parties. A promissory includes all the terms of repayment, including the rate of interest, the due date, and the number of payments to be made. This is different from an IO in that an IOU denotes that there is an outstanding debt but does not include the terms of repayment.

What Is a Promissory Note?

A promissory note becomes a legally binding agreement when the parties agree to the terms and sign the note. "Legally binding" means that each party agrees to a number of conditions and is willing to perform according to the terms. A contractual arrangement that includes many details and issues requires a more complex promissory note, whereas a basic, straightforward arrangement would necessitate only a simple promissory note. This allows a promissory note to be a very flexible document.

In the event that one party does not fulfill their obligations, a promissory note serves as a signed legal document to help remedy the contract breach. Promissory notes are often used when a customer wants to make a purchase but does not have the cash on hand to pay. The note obligates the customer to pay for the item as agreed in the terms of payment.

Banks, businesses, and individuals may lend money to borrowers and have them sign a promissory note. The note includes the terms of the loans. If the loan terms and conditions are long or complex in nature, a separate loan agreement may be provided.

For a promissory note to be enforceable, it must contain four components:

  • Parties
  • Promise
  • Sum certain
  • Signatures

Parties

The party or parties in the transaction are the person(s) or business entity(ies) directly involved or interested in the transaction. The party who draws the note is often referred to as the "maker," "drawer," or "promisor." The "drawee" or "payee" is considered the person in whose favor the promissory note is drawn.

A promissory note must list a current address and general information for all parties involved. All parties involved must be of legal age and of sound mind to sign a promissory note.

For example, if someone is not listed on a vehicle title or does not have power of attorney, they do not have the legal authority to enter an agreement by way of promissory.

Promise

The terms and conditions should define the promise. The promise should clearly express the specific sum of money promised and the exact terms of the agreement. Do not include alternatives such as yard work or house cleaning chores as a form of payment. This often complicates enforceability in legal proceedings if the agreement is broken.

Sum Certain

The amount to be paid along with the interest, appreciation, and details of nonpayment penalties should all be included in the sum certain component of the promissory note. A schedule of payments is often listed in the sum certain part of a mortgage promissory note. This section usually breaks down how much payment will go towards the principal and how much will go toward the interest at each scheduled payment.

Signatures

Without signatures, the promissory note is not a legally binding document. The lender should verify the identity of each party prior to acquiring signatures. This is most often achieved by requesting a photo ID such as a driver's license.

What Should a Promissory Note Include?

The number of payments to be made over a determined amount of time should be clearly defined and explained in a promissory note. A promissory note may include a default on secured debt as part of the agreement. This means that if the borrower fails to pay under the agreed-upon terms of the promissory note, then the lender can take the secured debt as a form of payment.

For instance, when car dealerships sell a vehicle, the dealer will often secure the debt by adding in vehicle promissory note that states that if payments are not made as agreed, then the dealer has the right to repossess the vehicle. This is known as a secured promissory note.

What Does It Mean to Default on a Promissory Note?

Defaulting on a promissory note means the borrower has failed to fulfill their repayment obligations under the agreed terms. This could involve missing scheduled payments, failing to pay the full amount by the maturity date, or violating other contractual terms.

Depending on the terms of the note, default can be automatic—such as when a payment is missed—or may require the lender to formally notify the borrower in writing of the default status. Many promissory notes include a grace period, after which late fees, increased interest, or other penalties apply.

In secured notes, default often gives the lender immediate rights to repossess or sell the collateral listed in the agreement. In unsecured notes, the lender may file a lawsuit to recover the owed amount.

Defaulting on a promissory note can lead to:

  • Accelerated repayment demands (the entire loan balance becomes due)
  • Credit score damage
  • Legal action, such as wage garnishment or liens
  • Loss of collateral (for secured notes)

Common Causes of Default

Borrowers may default on a promissory note for several reasons, including:

  • Financial hardship due to job loss, illness, or unexpected expenses
  • Disputes over the loan terms or product/service financed by the loan
  • Confusion or miscommunication regarding payment dates or interest terms
  • Lack of awareness of default triggers in the note (e.g., cross-default clauses)

Understanding what leads to default is essential for both lenders and borrowers when structuring promissory note agreements.

What Is a Notice of Default?

A notice of default is a formal communication from the lender to the borrower stating that the loan is in default due to nonpayment or another breach of the note's terms. This notice typically includes:

  • The total amount overdue
  • The specific nature of the default
  • A demand for payment or corrective action
  • A timeline for resolution before further legal steps are taken

Issuing a notice of default is often a prerequisite to initiating legal collection proceedings, especially in installment-based loans. It also provides the borrower an opportunity to cure the default before it escalates into a lawsuit or foreclosure.

Lender Remedies After Default

When a borrower defaults on a promissory note, the lender has several legal options depending on the agreement and whether the note is secured or unsecured:

Remedies for Secured Notes:

  • Repossession or foreclosure of collateral (e.g., vehicles, property, equipment)
  • Sale of the collateral to recover the debt

Remedies for Unsecured Notes:

  • Demand for full repayment (acceleration clause)
  • Filing a civil lawsuit to obtain a judgment
  • Wage garnishment or bank levies (post-judgment)

Many promissory notes also allow the lender to recover attorney fees and court costs, if outlined in the original agreement.

Borrower Defenses to Default

A borrower facing default allegations may have legal defenses, such as:

  • Improper or lack of notice of default
  • Ambiguous or missing contract terms, making enforcement difficult
  • Unfair lending practices or failure of the lender to uphold their responsibilities
  • Payment already made, but not recorded properly

These defenses can be raised in court if the lender sues for repayment. However, the burden often falls on the borrower to prove these claims.

If you're unsure about your rights under a promissory note, you can consult with a qualified attorney through UpCounsel’s platform for assistance.

Frequently Asked Questions

  1. What does it mean to default on a promissory note?
    It means the borrower has failed to meet the repayment terms agreed upon in the promissory note, such as missing payments or breaching other terms.
  2. Can a lender immediately take legal action after a missed payment?
    It depends on the terms in the note. Some require a notice of default and a grace period before legal action can begin.
  3. What happens to collateral if I default on a secured note?
    The lender may have the right to repossess or sell the collateral to recover the unpaid debt.
  4. Can a default be resolved without going to court?
    Yes. Many lenders prefer to settle through repayment plans, restructuring, or mediation before resorting to litigation.
  5. How can I protect myself when signing a promissory note?
    Ensure the terms are clear, fair, and legally reviewed. Consult an attorney to understand your obligations and rights.

If you need help with making sure you don't default on promissory note, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.