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A promissory note in Michigan is a legally binding document in which the borrower promises to repay the loan amount according to the agreed-upon terms.
It serves as a written record of the loan's key details, such as the loan amount, repayment schedule, interest rate, and other conditions, which makes it an essential tool for formalizing loan agreements in Michigan.
In this article, we'll explore the promissory note meaning, its components, types, and more.
Types of Promissory Notes in Michigan
Under Michigan law, there are two main types of promissory notes: secured and unsecured. These types differ in the level of protection they provide to the lender.
Types of Promissory Notes
#1. Secured Promissory Notes
A secured promissory note includes all essential elements of a loan, such as the debt amount, repayment terms, and interest rate, but it also provides added security. The borrower pledges collateral—an asset or property—as a guarantee for repayment.
Due to this added assurance, secured notes often have lower interest rates and may allow for larger loan amounts.
#2. Unsecured Promissory Notes
An unsecured promissory note is a more common type that outlines the loan terms without requiring any collateral. In this case, the lender relies solely on the borrower’s financial reliability and their promise to repay.
Since more risk is involved with unsecured loans, they often come with higher rates and smaller loan amounts than secured ones.
Signing Requirements for Promissory Notes in Michigan
The signing requirements for a promissory note in Michigan refer to the essential elements that must be included for the document to be legally enforceable.
The key requirements for a valid promissory note are as follows:
Signing Requirements
A written form of the agreement.
Identification of both the borrower and lender.
The vital elements of the Michigan debt agreement (the loan amount, repayment terms, and interest rate).
The borrower's signature.
These elements clarify the loan terms and ensure both parties understand their obligations. However, to simplify the process and avoid missing essential details, parties can use a promissory note template and adjust it to fit their specific agreement.
While witnessing or notarization are not legally required in Michigan, they can provide an extra layer of legal protection and validation. Additionally, reviewing a promissory note sample before signing can help ensure the document meets all legal standards.
Statutory Considerations for Michigan Promissory Notes
To meet Michigan promissory note requirements, it’s important to comply with the state's usury laws governing interest rates.
The table below outlines the maximum allowable interest rates for different loan types under Michigan law:
Loan Type | Maximum Interest Rate | Provision |
With a Written Contract | 7% per year | |
Without a Written Contract | 5% per year | Section 438.31 |
Criminal Usury Rate | 25% per year | |
Pawnbroker Loans | 3% per month |
Promissory notes in Michigan are versatile and can be used for both personal and business loans. However, it’s crucial to ensure that the interest rates comply with the state’s usury law to maintain the note’s enforceability.
How to Enforce a Promissory Note in Michigan
To enforce a promissory note in Michigan, a lender must take specific steps if the borrower defaults. If the borrower misses payments, it’s best to attempt to resolve the issue by contacting them directly and discussing a repayment plan. If this doesn’t work, the lender should send a formal demand letter outlining the unpaid balance and a deadline for payment.
If the borrower refuses to cooperate and pay, the next step is filing a claim in Michigan’s small claims court for amounts up to $7,000. Larger claims must be taken to a higher court. To ensure an enforceable promissory note in Michigan that the court recognizes, it’s important to act within the six-year statute of limitations, meaning legal action must be initiated within six years from the date of default.
How Can a Promissory Note in Michigan Be Changed or Revoked?
A promissory note in Michigan can be changed or revoked if both parties agree to it. This means the lender and borrower must discuss and come to a mutual decision to modify the terms or cancel the note. Changes might include adjusting the payment schedule, interest rate, or loan amount.
Any amendments must be in writing to avoid future disputes. This updated repayment agreement in Michigan should clearly outline the new terms and must be signed by both parties. Without a signed document, any verbal changes may be difficult to enforce in court.