Promissory Note: What to Check Before You Sign

A promissory note is one of the shortest contracts most people sign, which is exactly why it is risky: it is brief, looks standard, and every clause is operative. It is the document that says who owes whom, how much, and what happens if it is not paid.

This is an observational walk through the terms to confirm in a promissory note. It is general information, not advice about your note. The legal judgment about what to do with what you find is yours.

1. The basics: amount, rate, and schedule

Confirm the principal, the interest rate (and whether it is fixed or variable), the payment schedule, and the maturity date. Confirm whether interest is simple or compounding, and check the rate against any limit that applies in your state.

2. Acceleration

An acceleration clause lets the lender demand the entire balance immediately on certain triggers (a missed payment, a covenant breach). Confirm what triggers acceleration and whether there is notice or a cure period first — acceleration with no cure period turns one missed payment into the whole debt becoming due.

3. Prepayment

Confirm whether you can pay early without penalty. A prepayment penalty charges you for repaying ahead of schedule; if you expect to refinance or pay off early, this term decides whether that is economical.

4. Default and default interest

Confirm how default is defined, the cure period, and the default interest rate (the higher rate that applies after default). Confirm any late fees and how they stack with default interest.

5. Recourse and security

• Recourse vs non-recourse. Confirm whether the lender can pursue you personally and your other assets (recourse) or only specific collateral (non-recourse).
• Personal guarantee. For a business note, confirm whether a personal guarantee is attached — see the SBA guarantee guide.
• Security / collateral. Confirm what (if anything) secures the note and what the lender can seize on default.

6. The fine print that bites

• Confession of judgment. Some notes include a clause letting the lender obtain a judgment without a normal lawsuit on default — its availability varies by jurisdiction; confirm whether one is present.
• Attorney fees and collection costs. Confirm whether you owe the lender's collection costs.
• Governing law and venue. Find which state's law applies.

How to use this

A note's brevity hides how much each line does. Confirm acceleration, prepayment, default interest, recourse, and any confession of judgment, and mark anything you cannot answer. Those are the terms commonly reviewed with counsel, because they decide what happens if cash flow tightens. What you do with that information is your call.

Related: loan agreement analysis · SBA personal guarantee · collateral vs. personal guarantee · what is an acceleration clause · business purchase agreement scoring (seller notes in a business sale are a common place these terms appear).