California Forms

Types of Promissory Notes

  • A secured promissory note is a special type of legal document with the help of which a creditor, in case of non-payment of tax, can take some part of the debtor’s property to solve this problem. This type of promissory note is suitable for parties who do not know each other personally.
  • An unsecured promissory note is a document of the state of California using which the creditor cannot charge anything from the debtor in case of debt non-payment or delinquency. Respectively, this type of document is considered to be riskier. This form is suitable for people who trust each other.

The main difference between these two documents is indicated directly by their names and descriptions. When drawing up a secured promissory note, the borrower must specify the payment dates, interest rate, and penalties. Moreover, they must mention all the property to be transferred to the lender in case of late payments. 

While an unsecured promissory note does not oblige the borrower to pay the debt, if the loan is not paid, the case is resolved per state laws. What is more, when it comes to the court proceedings, the winning party may demand compensation for a lawyer’s services.

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California Laws Regarding Promissory Notes

Several laws in California are related to the subject of promissory notes regulated by the Civil Code. Below, we will mention several important regulations.

  • If the lender provides a loan exceeding $500 to the borrower and the borrower needs more than one year to repay it without relying on the amount of the debt, the promissory note will have to be drawn up in writing following the California Civil Code (Article 1624a);
  • A section of the California Civil Code states: in case of deferral of any goods, money, or interest rate on loan issued in any civil court of this state, the loan rate will be 7% for a period of one year. However, the parties have the right to conclude a contract for an interest rate of no more than 12% for any period, and this must be indicated in the form (Section 1916-1);

According to the Civil Code, any promissory note guaranteed by a mortgage or any trust deed, in the case of which a notice of default is recorded, cannot be used as collateral for deposits (Section 2924).