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A promissory note is a legal document that outlines a borrower's promise to repay a loan under specific terms. It formalizes loan agreements in Ohio by documenting repayment terms, due dates, interest rates, and other crucial details.
While creating a promissory note in Ohio does not legally require a lawyer, consulting one or using a comprehensive promissory note template can make the process easier, ensure accuracy, and strengthen its legal validity.
In this article, we’ll explore the meaning of a promissory note and its types, requirements, and considerations in detail. Let's begin!
Types of Promissory Notes in Ohio
While all promissory notes share the same purpose—to document the repayment agreement terms in Ohio, they can vary significantly when additional clauses and provisions are included. These variations often dictate the level of risk for both parties.
That said, the two most common types are secured and unsecured promissory notes.
Types of Promissory Notes
#1. Secured Promissory Notes
A secured promissory note provides added assurance to the lender, as the borrower is required to back their promise to repay with collateral—an asset or property equivalent to the loan value.
If the borrower defaults, the lender can claim the collateral to recover the loan amount, which makes it a less risky option for lenders.
#2. Unsecured Promissory Notes
Unsecured promissory notes rely solely on trust, as no collateral is involved. While it’s common among individuals with established relationships, they carry higher risks for lenders.
To mitigate this, unsecured notes may include higher interest rates. If the borrower defaults, the lender may face lengthy legal proceedings to recover the debt, with no guarantee of success.
Signing Requirements for Promissory Notes in Ohio
Creating a valid and enforceable promissory note under Ohio law requires meeting specific requirements. The following elements ensure the agreement is clear, reliable, and legally binding:
Signing Requirements
The promissory note must be in writing.
It must clearly identify both the borrower and lender involved in the agreement.
The note should include crucial terms of the Ohio debt agreement, such as the loan amount, repayment schedule, interest rate (if applicable), and any other necessary conditions.
Both parties must sign the document to confirm their agreement.
While Ohio law does not specifically mandate witnesses or notarization for a promissory note to be valid, adding notarization is highly recommended. Notarization verifies the identities of the parties involved and ensures the document was signed willingly, adding an extra layer of legal protection and reducing the risk of disputes.
Statutory Considerations for Ohio Promissory Notes
The Ohio promissory note requirements ensure compliance with state-specific laws, particularly interest rates and usury limits. These notes can be used for both personal and business loans, offering flexibility to borrowers and lenders.
However, it’s crucial to follow Ohio’s usury laws as outlined in Chapter 1343 of the Ohio Revised Code to maintain validity. Below is a summary of key usury laws applicable in Ohio:
Interest Rate Category | Rate/Condition | Applicable Laws |
With Contract | 8% (default rate). Higher rates allowed under specific conditions: Principal over $100,000 Payment to a registered security entity Secured by deed of trust or mortgage Single installment loan (not secured by household items) Business loans to entities Secured by borrower’s salary/wages | |
Without Contract | Federal short-term rate + 3% | |
For Monetary Judgments | As specified in the contract |
How to Enforce a Promissory Note in Ohio
To enforce a promissory note in Ohio, when a borrower defaults, the lender must first review the terms of the note to make sure the borrower has indeed defaulted. Suppose the borrower has not paid the sum they owe. In that case, the lender should attempt to recover the debt by contacting them directly and requesting payment. Sending a demand letter is a good next step, formally requesting payment and specifying the amount owed, as well as a deadline for payment.
If the borrower still fails to pay, the next step is to file a lawsuit in Ohio’s Small Claims Court for amounts up to $6,000. If the court rules in the lender's favor, they will receive a judgment, which allows them to collect the owed debt through legal methods, such as wage garnishment or bank levies for unsecured notes. For secured promissory notes, the lender may have the right to seize the collateral without needing a court order.
It is important to note that the statute of limitations for an enforceable promissory note in Ohio is six years from the due date or the acceleration date. Within this period, the lender must file their claim.
How Can a Promissory Note in Ohio Be Changed or Revoked?
A promissory note in Ohio can be changed or revoked if the borrower and lender mutually agree to the changes. It’s crucial to document any modification in writing and have all parties sign the updated agreement to ensure its enforceability.
This practice helps prevent misunderstandings and provides clear evidence of the agreed-upon terms. For reference, reviewing a promissory note sample can help clarify how these changes should be structured and recorded.
