What Makes A Promissory Note Invalid?

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“In most cases, these loans were informal arrangements between friends or family members, which you either lent or borrowed from once or twice. Other times, you had to enter into formal agreements with financial institutions such as banks or credit unions. In these cases, you have to pay back the lender using a promissory note.”

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What Makes A Promissory Note Invalid?

In a promissory note, a lender (payee/promissee) loans to the borrower (payor/maker/issuer). The promissory note contains the amount borrowed and the date the borrower will repay the money. Note payables or notes can serve as synonyms for promissory notes.

Although several types exist, the promissory note is usually a brief and straightforward document. What happens when a promissory note raises a question? To better understand its implications on your financial journey, let’s dive deeper into the elements that can cause a promissory note to void/what make a promissory note invalid.


Promissory Notes: What Are They?

A promissory note is a document that guarantees the repayment of a debt. The maker is the one who signs the note, and the person who owes the money is the one who pays it off. It usually includes language stating that repayment will occur and instructions regarding how and when to do so.

Promissory notes are often used when a party wants to borrow money from another party without providing collateral and a bank or other financial institution does not offer that loan. Promissory notes serve as binding agreements between parties in such situations, which are enforceable in court.

Some situations, however, may result in a promissory note losing its validity. For example, if the note’s terms are unclear or there is evidence that the note’s maker did not intend to repay the debt, the court may invalidate the note. It is also possible for the payee to not be able to sign a promissory note if they knew the maker could not repay the debt at the time of signing it.


Promissory Notes: How Do They Work?

There are two promissory notes: those that promise to pay back money and those that promise not to. Promissory notes typically include debt repayment terms, such as interest rates and payment schedules.

It is the borrower’s responsibility to follow the repayment terms outlined in the promissory note. If the borrower does not follow the terms, the lender may recover the money.


What Is The Content Of A Promissory Note?

The requirements for promissory notes differ from state to state, but they usually include the following:

  • The borrower’s name, address, and signature
  • Amount of the principal loan
  • Rate of interest
  • Lump sum or installment payment amount
  • Dates and schedules for payments
  • Penalties or late fees


Promissory Notes and Their Types

It is common for borrowers to sign promissory notes when entering into various debt agreements. These legal documents can protect borrowers and lenders in the event of non-compliance by either party.


A promissory note for a personal loan

Promissory notes are necessary to protect both parties if a friend or family member lends you money.


Promissory notes for student loans

If borrowers take out a federal student loan, they may sign a Master Promissory Note (MPN) that can cover multiple loans. Borrowers can sign a promissory note for private loans or a Master Promissory Note (MPN) for federal loans.

The MPN constitutes a student’s agreement to repay all loans based on the terms and conditions of the MPN. Federal student loan MPNs are valid for ten years.


An investor’s promissory note

A promissory note is a type of short-term financing where the holder assumes the investment risk. State or federal agencies, such as the Securities and Exchange Commission, may require that these notes be registered.


Mortgage Vs. Promissory Note: What’s The Difference?

An individual may need to sign a promissory note when buying a home through a mortgage or deed of trust.


Mortgage Vs. Promissory Note What’s The Difference


The purpose of a promissory note during a home purchase

Promissory notes are written agreements outlining the terms and conditions of the mortgage. It typically contains essential information such as the loan amount, the loan term, the payment amount, and the due date.

Lenders may have the right to foreclose properties if borrowers fail to comply with promissory notes.


A mortgage’s role in the home buying process

When homebuyers buy a property, they use a mortgage loan as collateral. It is technically not their property until the mortgage is repaid in full, so they do not own it yet. This type of secured loan typically uses the purchased property as collateral. As a homeowner makes payments on the mortgage, their equity grows.


Promissory Notes: What Do They Look Like?

Promissory notes should contain all the terms and conditions in the agreement between the parties involved. If you are writing a promissory note, you should check your state’s legislation since there are different rules for when a note is valid or invalid.

Promissory notes should typically include the following information:


Payor or borrower:

An individual or organization that offers to repay the debt.


Payee or lender:

This is the name of the person or business lending the money.


Amount of principal:

The total amount borrowed.


Interest rate:

The promissory note needs to state the interest rate. It is possible to have simple or compound interest rates.


Details of each payment:

A promissory note must detail how frequently and how much is due when multiple payments need to avoid defaulting.


Date the promissory note ends:

It is also possible in an agreement for a balloon payment, indicating the last installment of an amortized loan.



Promissory notes must include the signatures of both the borrower and the lender because a promissory note becomes invalid if neither party signs it.


How Do You Know If a Promissory Note Is Invalid?

To be valid, legal notes must meet several requirements. Your promissory note may be invalid if you do the following:


Uncompleted signatures

Borrowers and lenders must sign the original promissory note to prove the agreement. A promissory note without a signature won’t be considered a legally binding contract.


Contracts with unfair terms

If a promissory note contains any unfair clauses, it could invalidate the entire document. The terms of the promissory note must be fair to both parties involved. For example, almost all states have limits on the amount of interest that can legally accrue. Therefore, these terms can be unfair if the interest rate is too high or the repayment date is too soon.


A lack of clarity in the clauses

The terms and conditions of a promissory note should be clearly stated in plain language to avoid any ambiguities. If any clauses are unclear or difficult to understand, this may threaten the note’s validity.


Original copy lost

Lenders should keep copies of their original loan agreements if they lose or destroy the original promissory note.


Payment Amount Missed

The promissory note could be declared invalid if it doesn’t reveal the amount that the borrower owes the lender, or what installments are due. If there are multiple installments, then include each installment’s due date.


Rate of Interest Missing

There’s a common misconception that promissory notes aren’t legally binding if they don’t have interest rates. Even in the case of peer-to-peer lending, such documents rarely lack interest rate information. By putting it in writing, you can protect both parties and ensure their obligations are met.


Limitations have expired

If too much time has passed since the repayment date specified in the promissory note, the statute of limitations on collecting debt may have expired. It may expire 3-15 years after the note was created, depending on the state in which you live.


Unauthorized changes

It is also possible to void a promissory note by changing the terms after signing it. The document will no longer be valid if it is changed. Both parties must sign an amended version if any changes are necessary. This applies to changes in repayment date, interest rate, and borrowing amount.


How Does an Invalid Promissory Note Affect You?

The lender and the borrower can suffer grave consequences if a promissory note becomes invalid. The borrower may consider such circumstances as an option for getting out of a promissory note.

You need to consult an attorney if you are uncertain about the validity of your promissory note. If the lender attempts to collect the debt directly or by hiring a collection agency, the loan remains in effect.


What Is The Best Way To Prove The Validity Of A Promissory Note?

The court will check the following things to determine whether your note is valid:


A Promissory Note’s Form

A promissory note must exist in writing to be valid and enforceable. Therefore, lenders often use legally binding standard forms as promissory notes.


Aspects of the monetary system

To indicate the borrower’s intent, a promissory note is usually a notice that guarantees repayment of borrowed funds. Following current laws, a promissory note must express the borrowed funds into a legit currency.

  • An interest rate statement (if applicable)
  • Scheduled payments and their frequency
  • The maturity date of a loan (also called the maximum duration of a promissory note)
  • You must include this information about loan repayment in the note for it to be legally enforceable.


The signature

Despite the most comprehensive terms and a stated sum in the proper currency, a promissory note is invalid if it isn’t signed.

A promissory note has the same legal effect as a contract, so it can only be binding if the borrower signs it. The signatures of both parties indicate their acceptance of the terms of the agreement.


Maintaining the validity of your loan agreement

The following tips can help you create a rock-solid promissory note:

Getting your loan agreement notarized is an excellent way to add a third-party witness to your agreement. You do not need to have your promissory note notarized, and your note can still be valid without one.

The signature alone proves that the note is authentic. However, you may want a notary to witness the note in some circumstances.

At Attorney Real Estate Group, we store your loan documents so you can access them whenever you want. It is possible to use tools to craft valid loan agreements and get them signed, regardless of whether you take this extra step. Should you decide to get your promissory note signed by a notary public, this makes it easy.


Promissory Notes: How to Avoid Them

Ensure that the promissory note you create is valid. An invalid promissory note cannot be enforced in court, resulting in loss of money or property.

– If you want your promissory note to be enforceable, you must make it in writing and sign it by both parties. Oral agreements are not legally binding.

– It is essential that the promissory note contains all necessary terms, such as the amount owed, the interest rate (if any), and the repayment schedule.

– In your language, be clear, concise, and easy to understand. The agreements should contain clear language so that there are no misunderstandings.

– Witness the signing of the document by a third party. This ensures that both parties have signed it and agree to its terms.


Promissory Note FAQs


What are the legal ramifications of promissory notes?

There is no doubt that promissory notes are legal contracts enforceable in court if either party fails to keep their end of the bargain.


Third-party transfers of promissory notes are possible?

It is possible to assign a promissory note by way of assignment.


What is a default clause in a promissory note?

In a promissory note, a default clause describes what happens if the borrower fails to make regular payments or otherwise complies with the terms.


Modifications to a promissory note are possible.

The lender and borrower must agree in writing to changes made to a promissory note.


Is it possible to borrow money with a promissory note?

Using a promissory note to document personal and business loans between family members or friends is possible.



A promissory note is a legal document specifying a contract’s terms. Promissory notes, however, can be invalidated in court under certain circumstances. To avoid any legal repercussions down the road, it is essential to understand these conditions. We hope this article has provided you with all the information you need to ensure the validity and enforceability of your promissory notes.

Hedy Ghavidel

HEDY GHAVIDEL Managing Attorney  Roseville Office  1-866-471-6981  info@attorneysre.com Bio...

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