A promissory note is a written guarantee by a borrower, to pay back a debt or loan under specific terms to the lender. If you loan money, be familiar with promissory note limitations before accepting one.
Function
A promissory note is often used for personal loans between family and friends and can be secured with the buyer's property (house, car, jewelry) as collateral. The promissory note functions as documented evidence of the loan amount, the repayment terms and schedule and the agreed-upon interest rate.
Interest
You may hesitate at the idea of charging interest, but the Internal Revenue Service (IRS) may require you to report the interest as taxable income whether you collect it or not. If the IRS learns about the interest-free loan, the uncharged interest can be considered a tax-free gift, as long as the amount does not exceed the yearly allowed gift-tax exclusion.
Limitations
The promissory note you receive is covered under state statutes of limitation (SOL), restricting the time frame within which legal action can be taken for debt collection and varies from state to state (three to 15 years). The SOL typically begins after cause of action, such as demand for payment or delinquency.
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