A promissory note is a formal contract between a borrower and lender. It sets forth the interest rate and the repayment schedule for both principal and interest. It should explain where payments should be sent and it what form, whether the borrower can repay the loan early, what penalties the lender may impose if payments are late and whether the loan is secured by any property.

Whether you are borrowing for your business or lending money to a family member, it’s always important to sign a promissory note. If executed correctly, a promissory note is legally binding. It will also help substantiate any interest payments or deductions on your tax returns.

Several Web sites will let you create promissory notes by filling in a template, usually for a fee. For a sample promissory note, see http://www.ilrg.com/forms/promisry.html