California Promissory Note: What Is It?
A California promissory note is a written document that is legally binding once it is properly executed. The purpose of the document is to prove the existence of a loan that was provided to the borrower by the lender. California promissory notes are either secured or unsecured. When a promissory note is secured, the lender is given the right to take a specific piece of property, known as collateral, to act as payment for all or part of the loan if the borrower defaults on the payment. When a promissory note is unsecured, the lender cannot collect collateral for non-payment. Because promissory notes are a form of contract, they are regulated by California Civil Code. If the agreement between the borrower and lender includes a loan of more than $500 or if it will take the borrower more than a year to repay (regardless of the amount), the contract to repay (the promissory) note must be in writing according to California Civil Code §1624(a).
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 that may be charged. In California, this information is actually found in the California Constitution. The maximum amount of interest rate that may be charged on a consumer loan is 10%.
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 ad 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 presentment 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.
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