Make a Michigan Promissory Note

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

In Michigan, the maximum amount of interest that may be charged depends on whether there is a written agreement.

Without a written agreement, the maximum legal interest rate is 5%. With a written agreement, such as a promissory note, the maximum legal interest rate is 7%. It’s also important to note that there are several exceptions. However, MCLA 438.41 also states that it is a criminal offense to charge more than 25% interest per year.

How to Write a Michigan Promissory Note

The first consideration in writing a Michigan promissory note is its title. If the promissory note is secured, it is important to title it as such. Otherwise, the court will likely not award collateral. Instead, the note will be treated as unsecured. After the title, the Michigan promissory note should contain certain information to explain the relationship between the parties:

• The date that the parties entered into the agreement. This date is placed below the title and is written as month, day, and year. The date is an important component because it helps determine other legal deadlines if a legal dispute occurs because of the agreement or legal relationship between the parties.
• Identify each party by their legal name and their role within the contract. The parties are the lender, the borrower, and the co-signer. Co-signers aren’t required. List the legal name of each party and their role. For example, Samantha Sue Smith, Co-Signer.
• The address for each party. The mailing address should be listed for each party. For secured Michigan promissory notes, it may be helpful to include the physical address of the borrower and any co-signer if it is different from the mailing address. If the lender has a payment address that is separate from the mailing address, the payment address should be included in the section that addresses the actual repayment agreement.
• The principal amount loaned. A Michigan promissory note should list the total amount provided by the lender to the borrower. This does not include the interest charged for the loan. Before it is signed, make sure that the amount listed is correct.
• The amount of yearly interest charged on the loan. In Michigan, the maximum amount of interest that may be charged when there is a written agreement is 7%. This is often expressed as per annum or as the annual percentage rate (APR).
• Repayment information. All Michigan promissory notes should include repayment information. This includes the number of payments (referred to as installments), the amount of each payment, the due date for each payment, and whether there is a late fee assessed. The late fee amount should be documented in this section and when the charge will be added to the account.

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For secured Michigan promissory notes, it is important to provide information about the collateral. Without this information, the court will likely not treat the agreement as secured.

After the above information, a promissory agreement includes certain clauses that explain the terms and conditions that must be followed. The following is a partial list of common clauses that are often found in these sorts of agreements.

• Interest Due in the Event of Default. This clause documents the amount of interest that is charged if the borrower defaults. It is often at the higher end of what is legally allowed.
• Payment Allocation. The purpose of this clause is to explain how each payment is split between the principal balance and the interest charged.
• Prepayment. A prepayment clause documents whether there is a penalty for the borrower if they pay off the loan earlier than expected.
• Acceleration. Acceleration means that the lender may demand immediate repayment of the remaining money owed if the borrower does not comply with the terms of the agreement.
• Attorney Fees and Costs. If there is a legal disagreement over the promissory note, this clause is used to explain how attorney costs and fees for each party will be handled.
• Waiver of Presentments. With this clause, the lender does not need to be physically present for the borrower to make their payments as required.
• Severability. A severability clause enforces the rest of the promissory note if one section of it is found to be invalid.
• Conflicting Terms. This clause explains how any conflicting terms found in the promissory note will be addressed.
• Notice. This clause states whether the lender will notify the borrower if the lender plans to sue the borrower for defaulting on the agreement.
• Governing Law. A governing law clause documents the state whose laws will be used if a legal disagreement arises.

There is no legal requirement to have most Michigan promissory notes witnessed or notarized. However, a notary may be required for a promissory note related to a home loan. The borrower and any co-signer are required to sign and date the document for it to be executed.

A Sample Michigan Promissory Note with Examples for Each Step

A Michigan promissory note can be unsecured or secured; promissory notes in Michigan are regulated by state contract law. A secured promissory note must 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 Michigan 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 Michigan 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 and 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 clause 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 Michigan 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 Michigan, both unsecured and secured promissory notes must be signed and dated by the borrower and any co-signer; the lender need not sign. There is no legal requirement for most promissory notes to be witnessed or notarized in Michigan (a promissory note for a home loan, however, may need to be notarized). Still, 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 Michigan

National Consumer Law Center

Credit Union National Association Guide to State Usury Laws                                                          

Help Center/Federal Student Aid      

CollegeScholarships.org 

Office of Postsecondary Financial Planning MI Student Aid/Student Loan Repayments