Make a Texas Promissory Note

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

The maximum amount of interest that may be charged in Texas depends on whether the interest rate is addressed in writing. In writing, the maximum interest rate is generally around 18%, although there are some exceptions to the law. If the interest rate is not addressed in writing, the maximum amount of interest that may be charged is 6%.

How to Write a Texas Promissory Note

When writing a Texas promissory note, the first step is to ensure that it has a title that reflects whether the note is secured or unsecured. A secured Texas promissory note should use the word “secured” in the title to ensure that the lender’s right to collect the mentioned collateral is protected. Then, information about the parties involved and the loan is used to create the main agreement:

• The date the Texas promissory note was drafted. This date is placed below the title of the note. It is written as month, day, and year. Along with the date of the signatures, the creation date helps show that the borrower acknowledges they owe the money and helps determine specific legal deadlines.
• The name of each party and their role within the contract. Use the legal name of the borrower, lender, and any co-signer. Include their role after their name. For example, Robert P. Smith, Borrower.
• The full mailing address for each party. Remember to include the city or town, state, and zip code. If the Texas promissory note is secured, include the physical address for the borrower (and any co-signer) if it is different from the mailing address. Lenders often have a general mailing address and a payment processing address. The general contact mailing address for the lender should be listed here. The payment processing address should be listed within the repayment agreement.
• The principal amount of the loan. This is the amount provided by the lender without the interest.
• The interest rate charged per year. This is the interest rate charged yearly on the loan. It is listed as per annum, yearly interest rate, or annual percentage rate (APR).
• Payment agreement. The payment agreement is an important component of the Texas promissory note. It states how many total payments must be made, the amount of each payment, and the due date for each payment. The payment processing address should be provided in this section, too. If the lender uses a late fee, the amount of the late fee and when it will apply to the account should also be documented here.

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If the Texas promissory note is secured, it must have an accurate description of the collateral that will be used to satisfy all or part of the loan if the borrower defaults. Without a description of the collateral, the lender may not be legally entitled to the collateral.

Following the main body of the Texas promissory note, clauses are used to create the terms and conditions. There are many different clauses that may be used. The most commonly inserted clauses are:

• Interest Due in the Event of Default. If the interest rate will be increased if the borrower defaults on the terms of the agreement, the higher interest rate is listed in this clause.
• Payment Allocation. An explanation of how the payments made are split between the principal balance and the interest.
• Prepayment. Whether a financial penalty will be imposed on the borrower if they pay off the loan early.
• Acceleration. The lender’s legal right to demand immediate and full repayment of the remaining balance if the borrower defaults.
• Attorney Fees and Costs. An explanation of how incurred attorney fees and costs will be handled if there is a dispute related to the Texas promissory note.
• Waiver of Presentments. A clause that states there is no legal requirement for the lender to be physically present when the borrower makes payments.
• Severability. If a portion of the Texas promissory note is found invalid, the remainder of the note is still enforced.
• Conflicting Terms. An explanation of how any existing conflicting terms will be clarified.
• Notice. Whether the borrower will be notified by the lender if the lender is filing a lawsuit for default.
• Governing Law. The state whose laws will be followed if there is a disagreement over the promissory note.

Texas promissory notes do not have to be notarized. However, to make them a legal document, they must be signed and dated by the borrower. If there is a co-signer, they should also sign and date the agreement.

A Sample Texas Promissory Note with Examples for Each Step

A Texas 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 Texas 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 Texas 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 Texas 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 Texas, 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 promissory notes to be witnessed or notarized in Texas. 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 Texas

National Consumer Law Center

Credit Union National Association Guide to State Usury Laws                                                          

Help Center/Federal Student Aid       

CollegeScholarships.org

Comptroller.Texas.Gov   

Texas Education Agency (TEA)        

Texas Higher Education Coordinating Board  

Texas LawHelp.org       

Texas Access to Justice Foundation (TAJF)