Make a Iowa Promissory Note

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

The maximum interest rate for promissory notes is found in Iowa Code 535. This is known as a usury law. In the State of Iowa’s maximum amount of interest that may be legally charged by a lender is 5% per year.

How to Write an Iowa Promissory Note

An Iowa promissory note may be a legally binding agreement. To create the agreement, the first thing to consider is whether the note is secured or unsecured. If the promissory note is secured, it must be titled as such. Without the proper title, the court may not treat the agreement as secured if a legal dispute arises. There is specific information that should be included in an Iowa promissory note that explains the purpose of the agreement:

• The date the Iowa promissory note was created. This date is formatted as month, day, and year. It is placed below the title of the document.
• The legal names and mailing addresses of those entering into the agreement. The common parties include a lender and a borrower. There may also be a cosigner. Each party should be identified by their legal name and the role that they have in the agreement. For example, Lee Jacobs, Co-Signer. For secured Iowa promissory notes, it is important to list the physical address of the borrower and any mentioned co-signer. This can be beneficial when it comes to retrieving collateral.
• The principal amount of the loan. This is the amount that the lender provides to the borrower. It does not include the interest amount. Before signing the promissory note, this amount should be checked to ensure accuracy.
• The interest charged for the loan. This is the amount that the borrower pays for receiving the loan. In the State of Iowa, interest is capped at 5% per year. If a lender charges more than this, they may face serious legal repercussions.
• Payment agreement. An Iowa promissory note must include an explanation of how repayment will occur. The most common method is via installments. The most common installment is a monthly payment. The agreement should list how many installments are involved, when they are due (i.e., on the first of every month), and the amount of each installment. If the lender charges a late fee, the amount of the late fee and when it is charged should be included.

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If an Iowa promissory note is secured, a description of the collateral must be included as well.

There are some standard clauses that should also be included:

• Interest Due in the Event of Default. This clause explains how much interest will be charged if the borrower defaults on the loan.
• Payment Allocation. This clause explains how each installment payment is split between the principal balance and the interest.
• Prepayment. When a borrower wants to pay off a loan before it is scheduled to end, this is known as prepayment. Some Iowa promissory notes have a prepayment penalty.
• Acceleration. If the borrower does not comply with the terms and conditions of the loan, this clause gives the lender the power to demand immediate full payment.
• Attorney Fees and Costs. This clause explains how attorney fees and costs will be handled if a legal dispute arises.
• Waiver of Presentments. This explains to the borrower that the lender’s physical presence isn’t required for payment to be made.
• Severability. If any portion of the Iowa promissory note is unenforceable, the remainder of the agreement will still be valid.
• Conflicting Terms. This clause explains how any conflicting terms will be clarified. Generally, it involves the creation of an amendment that clears up the confusion and governs the agreement.
• Notice. The purpose of this clause is to explain to the borrower whether they will be notified if the lender sues them for default.
• Governing Law. A governing clause determines the state whose laws will be used to govern the agreement or resolve any legal conflict.

Most Iowa promissory notes do not need a witness. Most also do not need to be notarized. There are some, such as a mortgage, that must be notarized. The promissory note should be signed by the borrower and any co-signer.

A Sample Iowa Promissory Note with Examples for Each Step

An Iowa promissory note can be unsecured or secured. A secured promissory note should be titled as such. It must also be further identified 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 explicitly defined 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 property.

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

• Definition of Terms: This section includes a list of terms and their meanings used in the loan agreement  ("As used in this Agreement, the following terms shall have the meanings set forth below").
• 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 (as allowed by applicable Iowa state law governing maximum interest/usury rates for written contracts), how repayment will be made (installments, interest-only, lump sum, or, in the case of a secured promissory note, a balloon payment), the number of payments, the amount of each payment, the due date of each payment, any late fee to be charged for late payment, and where/how payment is to be made.
• Allocation of Payments: This section describes how much of each payment will apply to the 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: This section explains the facts and protections 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 a default and the interest due upon default (as allowed by applicable Iowa 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 prepayment penalty 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 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 Iowa, both unsecured and secured promissory notes must be signed and dated by the borrower and any co-signer; the lender need not sign. Most Iowa promissory notes do not need to be witnessed or notarized (mortgages, however, must be notarized).  Even where not required, the parties may decide to have the document certified by a notary public for protection in the event of a lawsuit.

Promissory Note Resources in Iowa

National Consumer Law Center

Credit Union National Association Guide to State Usury Laws                                                          

Help Center/Federal Student Aid       

CollegeScholarships.org 

Iowa Student Loan       

Iowa College Aid  

Iowa Legal Aid