Vehicle Promissory Note Overview

A vehicle promissory note is a legally binding document that functions as a written promise to pay someone for a car loan. It also functions as a transaction record with essential details of the loan transaction, making it useful if the IRS audits you or if a legal judgment is needed regarding the loan. This document should be signed and dated by both parties and then notarized in order to make it legally binding. The copies should be kept by both parties as well as a third party, and the original should be kept in a safe place, like a safe deposit box.

That said, there are some instances in which a vehicle promissory note will not be considered legally binding, such as:

  • If the note was signed under duress.
  • If a signature for the note was made on a blank page with terms yet to be added.
  • If the note includes an interest rate considered usurious.
  • If the note contains penalties that are not clearly expressed.
  • If the auto sale includes taking over a pre-existing auto loan (only applicable in some states).

You should carefully review all pertinent local, state, and federal laws before making or signing any promissory note.

Essential Vehicle Promissory Note Details

Information contained in a basic vehicle promissory note should include:

  • The amount of the loan.
  • How payment will be made.
  • What the interest rate will be.
  • What the payment schedule will be.
  • What the grace period on payments is, if any.
  • What defaulting and missed payment penalties will be.
  • The name, address, phone number, and/or email address of the borrower and lender.
  • Certification that the vehicle owner has the right to sell it.
  • The vehicle’s make, model, year, and VIN number.
  • A vehicle odometer statement, as per state law requirements.
  • If the vehicle’s title will be transferred to the borrower once the loan is paid.

Early Payoff Clauses

Sometimes a borrower may wish to pay off their loan early. If so, there should be provisions in the vehicle promissory note that address this. If a borrower can pay back the loan before it is due, whether repayment penalties or additional fees will be levied should be stated, as well as how much those penalties or additional fees should be. If there will not be penalties or fees, this should also be stated.

On the flip side, if a borrower breaches the terms of the loan, including by failing to make vehicle or insurance payments, then you may choose to add an acceleration clause, which will make the loan due immediately. Such a clause may read: “Upon the event of [list events causing acceleration], this vehicle promissory note will be due and payable immediately.”

Collateral

Collateral is another asset that the borrower puts up for possession by the lender should they default upon their payments, and you might want to add a provision for this in your vehicle promissory note, especially if the borrower has bad credit or displays other reasons to doubt their reliability. Assets could include the vehicle itself, as well as another vehicle, jewelry, furniture, or any other piece of tangible property agreed upon by both parties.

Collecting on a Promissory Note

Promissory notes are meant in part to guard against failure of payment, but sometimes this happens, at which point you will have to attempt to collect the payment or the collateral put up against failure of payment. Should events occur that trigger collection, the following steps should be taken:

  1. Ask for repayment in writing. You can do this by sending past-due notices, usually at 30, 60, and then 90 days after the payment due date.
  2. Talk to the borrower. During this time, you should also attempt to engage the borrower, finding out what their situation is and if they can make a partial payment or if they need a new payment plan.
  3. Create a debt settlement agreement. If a partial payment is accepted, a debt settlement agreement will allow both parties to formalize this.
  4. Engage a debt collector. If your efforts to collect or otherwise resolve the situation fail, you can then hire a debt collector to work to regain the unpaid funds or promised property. You can also sell the note to such a collector, who will then own the loan and be able to collect it in full.
  5. Pursue legal action. As a final resort, the borrower can be sued for full repayment.

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