Make a California Promissory Note

What Is the Maximum Amount of Interest That May Be Charged?

California promissory notes are also governed by the State’s usury laws. Usury laws in California determine the maximum amount of interest a lender may charge. The maximum amount of interest rate that may be charged on a consumer loan is 36%.

How to Write a California Promissory Note

First, determine whether the promissory note will be secured or unsecured. If the California promissory note is secured, it should be titled as “California Secured Promissory Note” or “Secured California Promissory Note.” Without the proper title, a dispute over the loan and its security may lead to the note being deemed as unsecured. The promissory note will need some basic information about the parties (known as the borrower and lender), the loan, payments, and the interest.

• Start by listing the date that the promissory note was created. This should be listed as month, day, and year.
• Include the full legal name and mailing address of the borrower. It’s also important to point out that this person is, indeed, the borrower. For example: John Q. Smith, Borrower. If the California promissory note is secured, it is a good idea to also include the physical address of the borrower for the purposes of collecting the collateral if the borrower defaults.
• Include the full legal name and mailing address of the lender. Mention that this person or entity is the lender. For example: Susan Jones, Lender; ABC Auto Financing Inc, Lender.
• List the principal amount of the loan. The principal amount is the true amount that the lender is providing to the borrower. Double check this amount. Listing the principal amount on its own will help the borrower understand the difference between the basic loan amount and what will be charged as interest.
• Provide the interest charged per year on the loan. Keep in mind that for a consumer, the highest amount of interest that may be charged is 10%. Charging more than the state maximum can expose the lender to serious legal problems by violating the State of California’s Constitution.
• Information about the payments. Most California promissory notes are satisfied by paying installments. Generally, installments are weekly, biweekly, or monthly. This section should also mention how much should be paid in each installment. If the lender charges a late fee, the amount of the late fee as well as when it is assessed should be listed.

For secured California promissory notes, it is important to include identifying information about the collateral. Without this information, a secured promissory note may be invalidated and deemed unsecured by a court.

California promissory notes, regardless of whether they are secured, should then include the following clauses:

• Interest Due in the Event of Default. This clause explains the amount of interest that the borrower will pay if they default on the loan.
• Payment Allocation. This clause explains how the payments made on the loan are divided between the principal and the interest.
• Prepayment. A prepayment clause explains what will happen if the borrower elects to prepay the loan. Some lenders penalize the borrower for paying off the loan before it is supposed to be paid off. However, it is not required for any lender to use a penalty for prepayment.
• Acceleration. This clause provides lenders with the right to demand the full balance of the loan if the borrower does not comply with the terms of the promissory note.
• Attorney Fees and Costs. This clause outlines who will pay attorney fees and costs if there is a legal dispute or lawsuit filed because of a dispute over the promissory note. The most common options include the parties paying their own costs and the borrower paying the lender’s attorney fees and costs if the borrower is found to be in default.
• Waiver or Presentments. A waiver of presentments clause explains that the borrower is responsible for making payments even if the lender is not actually present when the payment is made.
• Severability. This clause explains that if any part of the promissory note is found to be unenforceable that the rest of the note will remain in effect.
• Conflicting Terms. This clause is important because it explains that if there are conflicting terms within the promissory note, an amendment will clarify those terms and govern the contents of the note.
• Notice. A notice clause provides information about or if the lender will provide notice to the borrower if they file a lawsuit to obtain a judgment against them if they default on their payments.
• Governing Law. This clause defines which state will govern the agreement.

A California promissory note must be executed by having the borrower, the lender, and a witness sign and date the document. These signatures should also include the date that they took place.

A Sample California Promissory Note with Examples of Each Step

A California promissory note can be unsecured or secured; promissory notes are regulated by the California Civil Code. 

A secured promissory note should be titled "California Secured Promissory Note” or “Secured California Promissory Note.” A secured promissory note must be further identified as such with specific language and requires a detailed description of the security interest (the property that will serve as the collateral). A secured promissory note should include the following section:

• Security and Priority: In this section, the borrower and lender (payee) agree that all obligations under the note will be secured by the collateral defined in the security agreement entered into between the borrower and lender.  This section contains a general description of the collateral defined specifically in the security agreement.

A secured promissory note is generally accompanied by a security agreement that allows the lender to seize the collateral (specific property) in the event of default by the borrower.

The security interest in the specific property should be outlined in a UCC financing statement. When the financing statement is filed with the appropriate government agency, the lender's interest in the specific property is deemed "perfected," giving the lender top priority over future lenders seeking a security interest in the same piece of property.

Both unsecured and secured promissory notes in California should include the following sections:

• Definition of terms: This section includes a list of terms and their meanings used in the loan agreement.
• Payments: These are provisions relating to the terms for repayment of the amount due, including principal and interest, overdue amounts, default/nonpayment rate, manner of payment, and extension.

• This section should specifically note the date the promissory note was devised, the name and mailing address of the borrower and lender, the amount of money loaned to the borrower, the amount/annual percentage rate of interest to be charged, how repayment will be made (installments, interest only, lump sum, or, in the case of a secured promissory note, a balloon payment), the number, amount, and due date of each payment, any late fee to be charged for a late payment, and where/how payment is to be made.

• Allocation of Payments: This section describes how much of each payment will be applied to interest/principal.
• Guaranty/Co-Signer (optional): In this section, a third party (the guarantor) agrees to be directly or collaterally responsible for the obligation of the borrower to the lender in the event of default (the borrower fails to pay).
• Representations & Warranties: Representations and warranties in a promissory note supply facts and protection in the event of default, respectively, if the statements made are not true.
• Covenants: A covenant in a loan agreement requires the borrower to fulfill certain conditions, such as punctual payment of principal, or prevents the borrower from taking certain actions.
• Defaults/Interest Due upon Default: This section defines the events that constitute default and the interest due upon default (as allowed by applicable California state law).
• Acceleration: This section requires the borrower to repay the remaining balance in the event of a default.
• Prepayment: This section states whether there will be a penalty for prepayment or if the borrower is allowed to pay a sum of money to the lender before it is due/demanded without a penalty for doing so.
• Attorney Fees and Costs: This section describes which party will be held responsible for attorney fees and court costs should a case be filed and adjudicated in court due to a default.
• Waiver of Presentments: This section allows the lender to receive payment without presenting the promissory note.
• Non-Waiver: This section states that the entire promissory note is not waived if either party waives a certain section of the document.
• Severability: This section states that the rest of the promissory note will still be valid should a particular section be found illegal or incapable of enforcement.
• Integration: This section states that the promissory note constitutes the entire agreement between the parties.
• Conflicting Terms: This section states that an amendment will resolve any issue(s) and be determinative should the promissory note include terms that are in conflict.
• Notices: This section states the required form of all notices, requests, demands, claims, and other communications under the note, including notice to the borrower that the lender may seek a judgment against the borrower without notice and the addresses to which all official or legal correspondence should be delivered.
• Governing Law: This section defines the state law that will govern the promissory note.
• Dated Signature: In California, both unsecured and secured promissory notes must be signed and dated by the borrower, any co-signer, the lender, and a witness. There is no legal requirement for a promissory note to be notarized in California, but the parties may decide to have the document certified by a notary public for protection in the event of a lawsuit.