Understanding Promissory Notes with Interest

A promissory note is a legal document in which one party promises to pay a specific sum to another party at a predetermined time or on demand. Including interest in a promissory note can help both lenders and borrowers understand the cost of borrowing money over time. Below are three diverse examples of promissory notes with interest to illustrate how they can be structured in different scenarios.

Example 1: Personal Loan Agreement Between Friends

In this scenario, two friends agree to a personal loan where one lends money to the other. The note outlines the terms clearly, including interest.

John lends $5,000 to his friend Sarah to help her with unexpected medical expenses. They agree that Sarah will pay back the loan within one year with an interest rate of 5%.

Promissory Note
Date: April 1, 2023
For value received, I, Sarah Johnson, promise to pay John Smith the sum of $5,000 with interest at the rate of 5% per annum.
The total amount due, including interest, will be paid in full by April 1, 2024. Payments will be made monthly, with the first payment of $425.00 due on May 1, 2023.
If I default on this agreement, I understand that I may be subject to additional fees and legal action.
Signed,
Sarah Johnson

Notes:

• This example can be adjusted based on the amount borrowed and the interest rate.
• Friends can customize the repayment schedule according to their agreement.

Example 2: Business Loan from a Bank

In a more formal context, a small business owner approaches a bank for a loan to expand her business operations. The bank provides a promissory note detailing the loan agreement and applicable interest.

Emily seeks a $50,000 loan from ABC Bank to purchase new equipment for her bakery. The bank offers a 7% interest rate, with a repayment term of five years.

Promissory Note
Date: March 15, 2023
For value received, I, Emily Davis, hereby unconditionally promise to pay ABC Bank the principal sum of $50,000 with interest at the rate of 7% per annum.
Payments shall be made in monthly installments of $1,000 starting April 15, 2023, until the total amount is paid in full by March 15, 2028.
In the event of default, the entire remaining balance shall become due immediately, and I agree to pay all reasonable attorney fees and costs incurred by the bank in enforcement of this note.
Signed,
Emily Davis

Notes:

• This example includes terms for default and legal fees, which are common in commercial agreements.
• The repayment schedule can be adjusted based on the bank’s policies.

Example 3: Student Loan Agreement

This scenario illustrates a promissory note used for educational purposes, where a student takes a loan to finance their college education with interest.

Mark is a college student who needs $15,000 for tuition. His family agrees to lend him the money with an interest rate of 4% and a repayment period of ten years after graduation.

Promissory Note
Date: May 1, 2023
For value received, I, Mark Thompson, promise to pay my parents, John and Lisa Thompson, the total amount of $15,000, with an interest rate of 4% per annum.
Repayment will commence six months after my graduation and will continue until the loan is paid in full over a period of ten years.
Monthly payments will be calculated based on the remaining balance at that time.
If I fail to make payment on time, I understand that a late fee of $50 may be charged for each missed installment.
Signed,
Mark Thompson

Notes:

• This example demonstrates how family loans can also include interest and repayment terms.
• The repayment grace period after graduation is a common practice for student loans.