Unsecured Promissory Note Template

What is an Unsecured Promissory Note?

An unsecured promissory note is an acknowledgment of debt that does not involve any collateral. Unlike secured notes, where assets such as vehicles or savings accounts can be seized if repayment fails, unsecured notes depend on the borrower’s credibility and intent to repay.

While there’s no asset to claim if the borrower defaults, the note still creates a legal obligation to repay the debt. This can be enforced through legal action. An unsecured note can make lending straightforward, fast, and reliable when prepared correctly.

 

Key Components

A standard unsecured promissory note should include:

• Borrower’s Name
• Lender’s Name
• Loan Amount ($)
• Interest Rate (%)
• Repayment Term & Frequency
• Due Date
• Late Fees or Interest on Default
• Co-signer (if applicable)
• Prepayment Penalty (if any)
• Signatures from all parties

Even without collateral, this document carries the same enforceability as a secured note.

 

How to Make an Unsecured Promissory Note (Step-by-Step)

Step 1 – Screen the Borrower

Because unsecured loans carry more risk, lenders need to be confident in the borrower’s ability and intent to repay. Review their:

• Credit score
• Current debt obligations
• Income stability
  

Credit reports from Equifax, Experian, or TransUnion can provide insight. If concerns appear in the reports, the lender may opt to:

• Require a co-signer
• Charge a higher interest rate
• Choose a secured promissory note instead

 

Step 2 – Set the Loan Terms

There are no limits on the loan amount, as long as both parties agree. However, lenders must comply with:

• State usury laws (which cap interest rates)
• Applicable Federal Rate (AFR) minimums, especially for loans over $10,000 (rates available via the IRS)
  

Loan terms should also define:

• Payment frequency (weekly, monthly, quarterly, or lump-sum)
• Start and due dates
• Whether payments include interest-only installments, regular installments, or one-time repayment

 

Step 3 – Address Fees & Defaults

An unsecured note should still lay out consequences for late or missed payments. Common instances include:

• Interest on default: Often triggered after 15 days of non-payment
• Late fees: Charged after a grace period, such as 5 or 10 days
• Co-signer obligations: If included, the co-signer becomes fully responsible if the borrower fails to pay

 

Step 4 – Finalize and Fund the Agreement

Once the terms are agreed upon, all parties—including any co-signer—should sign the document. This can be done:

• In person with printed copies
• Digitally

After signing, the lender disburses the loan via the agreed method (cash, check, wire, PayPal, etc.), and the borrower becomes legally obligated to follow the repayment schedule until the balance is paid in full.

 

Enforcing an Unsecured Promissory Note

Even though there’s no collateral involved, the lender still has legal rights if the borrower defaults. The lender may:

• Send a formal demand for payment
• File a lawsuit in small claims or civil court
• Hire a collection agency

That said, recovery isn’t always guaranteed. Legal proceedings may involve additional costs, and there’s always a chance the borrower simply cannot repay.

 

When to Use an Unsecured Promissory Note

Unsecured notes are best suited for:

• Small personal loans
• Loans between friends, family, or trusted colleagues
• Borrowers with strong credit or financial standing
  
• Situations where collateral isn’t feasible or necessary

If there’s any doubt about the borrower’s ability to repay, or the loan amount is significant, consider drafting a secured promissory note instead to protect your investment.