Create a Legally Sound Promissory Note

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By: Bill Henry
PublishedMar 22, 2022
9 minute read

A promissory note is a written agreement to pay back money in a certain time with specific terms. It is often used in real estate, vehicle, personal, and college loans. A promissory note is particularly important if you are lending someone a large amount of money. It provides a legal record of your loan, which helps protect you and ensures you will be repaid.

A lawsuit is sometimes your only means of legally enforcing a promissory note if the opposing party fails to pay you. As in many states, a promissory note must meet multiple conditions to be enforceable in Colorado. Read this article to better understand how a promissory note works and what it must include.

Get an Attorney to Review Your Promissory Note

A promissory note is exactly what its name suggests — a promise to pay you back. Ideally, you loaned money to a reliable person who will make good on their promise. Unfortunately, that’s not always reality. Robinson & Henry’s Civil Litigation Team will thoroughly review your loan documents to ensure they are providing the full legal protection you need. Call 303-688-0944 today to begin your case assessment.

white paper with PROMISSORY NOTE written at the top in bold black letters

What’s a Promissory Note and When Do I Need One?

A promissory note is essentially a promise, put in writing, to pay another person a sum of money. In this article, we refer to the person making the promise as the borrower, and we’ll call the person who receives the payment the lender. In legal terms, these people are called the maker and the payee, respectively. But let’s stick with the more familiar terms of borrower and lender.

A promissory note is considered an unconditional promise to pay. This means the borrower’s obligation to pay is not subject to any condition, such as requiring a particular action to occur first.

Promissory notes are used in all kinds of lending situations. It could be something as simple as a one-time loan to a friend. Or it could be more complex like a car note or a mortgage.

What Type of Promissory Note Should I Use?

Promissory notes come in various forms which largely depend on the type of loan agreement. You should craft your promissory note to fit the type of transaction it concerns.

Types of promissory notes include:
  • simple promissory note
  • demand promissory note
  • secured promissory note
  • unsecured promissory note

Simple Promissory Note

If you’re expecting a lump sum repayment, you will typically use a simple promissory note.

For example, let’s say you loan a friend $1,000. Your friend agrees to repay the money by January 1.

A simple promissory note will state that the full amount is due on the specified date. You will not need a payment schedule.

You can also decide whether to charge interest on the loan amount and include the interest in the document if needed.

Demand Promissory Note

A demand promissory note makes the payment due when the lender asks for the money back. Once a lender has “demanded” repayment, the borrower is required to repay the debt immediately.

Demand promissory notes are best suited for smaller loans between family and friends, or other informal relationships.

A demand promissory note is different from a simple promissory note in that the borrower is not on a specific timeline for repayment. Instead, the borrower waits to repay the debt until the lender demands repayment. The lender must request repayment in these cases by sending the borrow a demand for payment letter.

Essential to a Demand Promissory Note

Your demand promissory note should contain information about the steps required to demand payment and what will happen if the borrower does not pay when you demand it. It is crucial that you follow the procedures that have been laid out in the promissory note.

Once you are sure that you understand and have complied with those requirements, you can send a demand letter.

Demand for Payment Letter
A demand letter notifies the borrower that you want the money now and that the repayment period has ended. A demand letter should include:
  • the date of the letter
  • the names of the borrower and lender
  • the original amount of the loan
  • the date of the promissory note, as well as any reference number or account number it contains
  • the payment schedule that you and the borrower agreed upon
  • the unpaid amount you are now collecting, including interest
  • a statement that you are making a demand for the full amount owed now
  • a statement clarifying that you will take legal action if the borrower does not pay you
  • a statement that the borrower will be responsible for attorneys’ fees, court costs, collection costs, and interest if they do not pay
  • your contact information
  • your signature
Enforcing the Demand Note

If the borrower does not pay you by the date specified in your letter, they are now in default. This simply means they are in violation of the terms of the promissory note. If this happens, you can move forward with legal action against the borrower.

It is important to document your expenses from this point forward. Under the terms of your note, the borrower is likely responsible for them.

The simplest first step after sending the letter should be to send a follow-up letter. This letter should let the borrower know they are in default and set a date by which you must receive payment or you will take legal action.

If the borrower still does not repay you, you have a number of legal options, including:
  • repossessing any collateral the borrower put up against the note
  • sending the debt to a collection agency
  • selling the promissory note to another party that will try to collect it
  • filing a lawsuit against the borrower

Secured Promissory Note

A Colorado secured promissory note requires the borrower to put up assets as collateral. If the borrower does not pay back the loan within the agreed-upon time frame, you have the right to seize those assets.

For example, when you purchase a home, the house is collateral on your mortgage. Your bank can seize your home if you fail to make the required payments.

The note must be titled appropriately, and it must include specific language with a detailed description of the security interest. That’s the property that will serve as the collateral.

Security Agreement

A secured promissory note is generally accompanied by a security agreement. This allows you, as the lender, to seize the collateral in the event the borrower fails to pay you.

Additionally, you must outline the security interest in a Uniform Commercial Code financing statement. Then you need to file the financing statement with the Colorado Secretary of State’s office.

Once you have done this, your interest in the collateral is considered perfected. This gives you top priority over other lenders who try to get a security interest on the same piece of collateral.

What You Cannot Collect with a Secured Note

If you opt for a secured promissory note, you should note that Colorado law bars you from collecting on a health insurance receivable or other intangible assets. Colo. Revised Statutes § 4-9-408

A health insurance receivable means an interest in or claim under an insurance policy which is a right to payment of a monetary obligation for health-care goods or services provided.

With secured promissory notes, it is better to stick to physical property that is easy to repossess in the event of nonpayment.

Unsecured Promissory Note

An unsecured promissory note does not allow the lender to secure assets for a loan. If the borrower fails to make payments, you have to file an action in court or go through other legal processes to enforce the note.

Now let’s look at what Colorado law requires you to include in your promissory note.

Interest Rates and Repayment Options

Colorado’s Consumer Protection Laws do not allow you to charge more than 45 percent interest. If the promissory note does not specify an interest rate, Colorado law sets the annual rate at 8 percent.

Promissory Note Repayment Options

Failing to outline payment amounts and schedules can cause confusion, unmet expectations, arguments, and even legal action. Therefore, you should ensure both parties agree to one of the following four repayment options before signing a promissory note.

Installment Payments

Installment payments are often used to buy expensive items like cars, boats, and appliances. Typically, the payments are made in equal monthly amounts, including interest, until the borrower has repaid the principal balance. The principal balance is the total amount borrowed.

If they are financially able, borrowers can place a down payment on the installment loan to reduce the total amount of interest paid.

Installment Payments with a Final Balloon Payment

Balloon payments are often used in mortgage loans. These payments are good for short-term borrowers because they allow for lower interest rates when compared to those of long-term loans.

In a balloon payment, the borrower agrees to pay a low-interest rate for a specified time (let’s say five years). The borrower pays back only a fraction of the principal balance in that time.

When that term ends, the borrower may have the option to reset the loan (possibly at a higher interest rate) or pay off the remaining balance (the balloon).

Due on a Specific Date

Borrowers and lenders can agree to a specific payback date. Lenders will know exactly when they’ll get their money, and borrowers will not have to stress about monthly payments. Instead, the borrower repays the entire amount — the principal plus any interest — on a specific date.

Due on Demand

These notes are typically used for loans between family and friends. Due-on-demand loans are sometimes called open-ended loans, as there are no specific payment terms.

Borrowers can pay back the note when they are financially able. Meanwhile, lenders can be assured they will have an income source if necessary.

If a promissory note does not have any payment terms, it is automatically considered a due-on-demand note.

What Should a Promissory Note Include?

Definition of Terms

This section includes a list of terms and their meanings used in the loan agreement.

Payment Provisions

Payment provisions spell out the terms for repayment of the amount due.

Those terms can include:
  • principal and interest
  • overdue amounts
  • default or nonpayment rate
  • manner of payment
  • extension
Additionally, the payment provision section should note:
  • the date the promissory note was created
  • the name and mailing address of the borrower and lender
  • the amount of money loaned to the borrower
  • the amount or annual percentage rate of interest to be charged
  • how repayment will be made
  • the number of payments
  • the amount of each payment
  • the due date of each payment
  • any late fees you will charge
  • where and how payment will be made.
Allocation of Payments

This section describes how much of each payment will be applied to the interest/principal.


In this optional section, a third party, called the guarantor, agrees to be responsible for the borrower’s obligation to the lender if the borrower fails to pay.

Representations and Warranties

Representations and warranties are factual statements given by one party to another in a loan agreement.

Parties will generally make representations before entering into a contract to convince the other party that the agreement will benefit them. It is a claim relating to past facts or existing circumstances that the lender relies on when entering the contract.

For example, you could make a representation that you have full ownership over the asset you have offered as collateral in a secured promissory.

Meanwhile, warranties are meant to assure the lender that the borrower’s statements are true. Because these terms are written in the agreement, they will protect the lender if the borrower breaches a warranty.


A covenant in a loan agreement requires the borrower to fulfill certain conditions. One example would be paying the principal amount in a timely manner.

A covenant also prevents the borrower from taking certain actions.

Defaults and Interest Due upon Default

This section defines the events that constitute a default and the interest that will be due upon default as allowed by Colorado law.


An acceleration clause allows the lender to require the borrower to immediately repay the loan’s remaining balance under certain circumstances. For instance, the lender has the option to initiate the acceleration clause if the borrower misses too many payments.

In the 1954 case Barday v. Steinbaugh, the lender never invoked the acceleration clause despite mostly late payments from the borrowers. The lender then lost a monthly payment in the mail, and the borrowers failed to make a substitute payment. The lender then invoked the acceleration clause. However, the lender continued to accept monthly payments from the borrowers after notice of acceleration.

The lender then filed suit against the borrowers to collect the entire amount of the promissory note. The trial court found in the borrowers’ favor, ruling that the lender had waived her acceleration rights by accepting payments on the promissory note following the notice of acceleration.

The lender appealed, but the court affirmed the decision:

When the holder accepted payments after notice of her election to accelerate of the maturity date of the note, such acceptance operated as an absolute waiver of her right to accelerate.

Barday v. Steinbaugh, 130 Colo. 10, 11, 272 P.2d 657, 657 (1954)


This section states whether there will be a pre-payment penalty, or if the borrower is allowed to pay a sum of money to the lender before it is due or demanded without a penalty for doing so.

Attorney Fees and Costs

This section specifies which party will be held responsible for attorney fees and court costs if a case must be filed and adjudicated in court due to nonpayment.

Waiver of Presentments

This section allows the lender to receive payment without presenting the promissory note.


This section states that the entire promissory note is not waived if either party waives a certain section of the document.


The severability section ensures that the rest of the promissory note will still be valid even if a particular section is found illegal or incapable of enforcement.


This section states that the promissory note encompasses the entire agreement between the parties.

Conflicting Terms

In the event of conflicting terms, this section covers how the parties can amend the promissory note to resolve any issues.


This section spells out the required form of all notices, requests, demands, claims, and other communications under the note. This includes giving notice to the borrower that you may seek a judgment against him or her without notice. This section should also include the addresses where all official or legal correspondence should be delivered.

Governing Law

This section defines the state law governing the promissory note.

Dated Signature

In Colorado, both unsecured and secured promissory notes must be signed and dated by the borrower and any co-signer. All parties must print their names on the document.

A promissory note is not required to be witnessed or notarized in Colorado. Still, you may decide to have the document certified by a notary public. Doing so can offer protection in the event of a lawsuit.

What Makes a Promissory Note Enforceable?

A legally binding promissory note in Colorado must include the names of the borrower and lender. Both sides must sign and date the agreement. It also must contain the amount of the loan and the time frame for repayment.

Colorado law does not require you to formally record your promissory note with a government agency. If the document is properly filled out and is signed by both parties, it is considered legally enforceable.

Deed of Trust

You can also use a deed of trust to secure the loan. In Colorado, real estate purchases in which the purchaser borrows money to pay for property are typically secured with a deed of trust.

A deed of trust is a three-party agreement among a borrower, a lender, and the county public trustee. The deed of trust serves as a lien on the property until the borrower has paid off their loan. At that point, the lender can make a request to the public trustee to release the deed of trust. When this is recorded, it removes the lien against the property..

Ensure Your Promissory Note is Air Tight

If drafted correctly, a promissory note could mean the difference between a bad debt and recovering significant amounts of money. However, promissory notes are often misleading in their simplicity, and errors could lead to a financial disaster. Whether it’s a personal loan or something more costly, the Civil Litigation Team at Robinson & Henry will make sure all your legal bases are covered. Call 303-688-0944 today to begin your case assessment.

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