Key Takeaways:

  • Types of Promissory Notes: California recognizes both secured and unsecured promissory notes, with secured notes offering more protection for lenders.
  • Legal Requirements: A promissory note must include essential elements like identification of parties, loan amount, repayment terms, and signatures.
  • Usury Laws: California limits interest rates to 10% annually for most personal loans, with exceptions for certain financial institutions.
  • Enforcement & Collection: Legal actions, default clauses, and secured assets can help lenders recover debts.
  • Security & Collateral: Mortgages, deeds of trust, and UCC-1 filings can be used to secure promissory notes.
  • Bankruptcy Implications: Secured creditors have higher priority than unsecured creditors in bankruptcy proceedings.
  • Oral Promissory Notes: Though enforceable in some cases, written agreements are always recommended for clarity and legal protection.

California promissory notes are created for the purpose of adding security and format between two parties when lending money is involved. There are two types of promissory notes: secured and unsecured. The method used should be agreed upon by the lender and borrower prior to signing the documents.

The promissory notes address several necessary areas. Sections addressing interest rates, details on parties involved, late fees, and other important information are included in the documents. Signing of a completed document ensures the promissory note is now legal. The lender can begin the collection process from the borrower after the agreement has been completed and signed by both parties.

Writing a California Promissory Note

  1. Download and submit the following:
    • Start date of the document in DD/MM/YY format
    • Borrower's name and mailing address
    • Lender's name and mailing address
    • Principal amount
    • Annual percentage
  2. Payments should be submitted by including the balance plus any applicable late fees in the MM/DD/YY format. For installments, check a box next to the repayment method that applies. Be sure to include the amount, installment method, and the owed late fees.
  3. If the note is "secured," check the security level being used. Be sure to enter all information about the property being used as collateral. This section is required to be reviewed by the borrower.
  4. The following titled sections should be reviewed:
    • Default Interest Due
    • Payments
    • Prior Payments
    • Acceleration
    • Attorney's Costs
    • Presentments Waiver
    • Non-Waiver
    • Severability
    • Integration
    • Terms that Conflict
    • Notice
    • Co-Signer (applicable box needs to be checked)
    • State of Governing Law
  5. A witness must be present to witness the signatures. The following should be provided:
    • Signature of Lender
    • Date of signature in MM/DD/YY format
    • Name in print form
    • Borrower's signature
    • Signature date in MM/DD/YY format
    • Borrower's printed name
    • Co-signer's signature if applicable
    • Co-signer's signature date in MM/DD/YY format
    • Co-signer's printed name
    • Witness' signature
    • Date of witness' signature (MM/DD/YY format),
    • Witness' printed name.

Usury Laws and Interest Rate Limits in California

California imposes strict usury laws to prevent excessive interest rates. Generally, personal loans are subject to a maximum interest rate of 10% per year unless the lender is a bank, credit union, or certain licensed financial institutions, which may have different legal caps.

If a lender charges an interest rate above the legal limit, they may be required to forfeit all interest earned on the loan or face additional penalties.

It’s crucial to structure a promissory note to comply with California Civil Code Section 1916-1, which governs usury and interest caps. In case of uncertainty, consulting a legal expert can help ensure compliance.

California Promissory Note Requirements

A California promissory note must meet specific legal requirements to be enforceable. It should clearly outline:

  • The names and addresses of both borrower and lender.
  • The principal loan amount and applicable interest rate.
  • Repayment terms, including installment frequency and due dates.
  • Late fees and penalties in case of missed payments.
  • Security details, if applicable, including a description of collateral.
  • Signatures of all involved parties, including witnesses if required.

Additionally, California law mandates that promissory notes include a consideration clause, meaning both parties must receive some benefit from the agreement.

How to Write a Secured California Promissory Note

A secured promissory note in California is used when money is loaned between two parties. The steps below outline how to write a secured promissory note.

  1. Begin by entering the lender's complete information, the current date, the borrower's complete information, the amount of the loan, and the amount of the interest involved in the loan.
  2. Choose the method you would like the borrower to repay the balance.
    • There are several repayment options. No installments requires the entire balance to be paid by the borrower in one payment. Installments consist of multiple payments at scheduled intervals. Interest only payments consist of the borrower paying only the interest until the balance is paid in full.
  3. If an installment option is chosen, enter the repayment method on the lower portion of section 1.
  4. Enter the entire balance due date and the interest percentage in the event of default in sections 2 and 3.
  5. In section 6, identify the amount of time that can pass beyond the due date before a late fee is required to be paid.
  6. In section 8, note the amount of time until acceleration takes place.
  7. Finally, names of the lender, borrower, and a witness must be printed and signed followed by the date at the bottom of the document.

Security and Collateral for Promissory Notes

A secured promissory note provides additional protection for lenders by attaching collateral to the loan. In California, common forms of security include:

  • Real estate (via deeds of trust or mortgages).
  • Business assets, including inventory, equipment, or accounts receivable.
  • Personal property, such as vehicles, jewelry, or investment accounts.

To properly secure a loan:

  1. Describe the collateral in detail in the note.
  2. File a UCC-1 financing statement with the California Secretary of State for non-real estate assets.
  3. Ensure proper documentation (e.g., deeds of trust for real estate-backed loans).

If the borrower defaults, the lender has the right to claim the pledged asset without needing to pursue a lawsuit.

How to Write an Unsecured California Promissory Note

The unsecured promissory note used in California outlines payback for a loan between two parties. Unsecured notes provide more risk than a secured note. There is more risk for the lender in this scenario. If the borrower fails to pay back the loan, there is no guarantee the lender will receive his money he loaned.

  1. Begin by completing the top section of the page. This will require the complete information of both parties and the amount of the balance owed including interest.
  2. Decide how you would like the borrower to pay back the balance.
    • You can choose from no installments, installments, and interest-only payments.
    • To use installments, choose the time length interval between payments.
  3. In section 2, enter the final date for the entire balance to be paid.
  4. In sections 6 and 7, the amount of the late fees will be entered. The grace period before the late fee takes effect should also be noted. Next, enter the number of days before acceleration takes place.
  5. Finally, the document needs to be dated along with the signatures of the borrower, lender, and witness.

Enforcing a California Promissory Note

A lender can enforce a promissory note through legal means if the borrower defaults. The steps typically include:

  1. Sending a demand letter requesting repayment before initiating legal action.
  2. Filing a lawsuit for breach of contract in a California civil court.
  3. Securing a judgment, allowing for wage garnishment or liens against property.
  4. Negotiating settlements to avoid lengthy litigation.

For secured notes, lenders can enforce their rights through foreclosure or repossession processes, depending on the collateral type. In contrast, unsecured notes require a court judgment before collection efforts can begin.

Impact of Bankruptcy on Promissory Notes

If a borrower declares bankruptcy, the treatment of the promissory note depends on whether it is secured or unsecured:

  • Secured creditors have priority and may claim the pledged collateral before unsecured creditors receive any payment.
  • Unsecured creditors must file a claim with the bankruptcy court but often receive little or no repayment.
  • Certain debts may be discharged, making them uncollectible.

Lenders should consider these risks when issuing loans and may require co-signers or additional security to mitigate potential losses.

Frequently Asked Questions

  1. Are promissory notes legally binding in California?
    Yes, as long as they include essential elements like loan amount, repayment terms, and signatures.
  2. What happens if a borrower defaults on a promissory note?
    The lender can take legal action, including filing a lawsuit or enforcing a lien on collateral if the note is secured.
  3. Can an oral promissory note be enforced in California?
    In some cases, yes, but written agreements provide stronger legal protection.
  4. What is the maximum interest rate allowed on a promissory note?
    Most personal loans are capped at 10% annually, though certain lenders may be exempt.
  5. How does a secured promissory note differ from an unsecured one?
    A secured note is backed by collateral, reducing risk for the lender, while an unsecured note relies solely on the borrower's promise to pay.

If you need help with writing California promissory notes, 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.