A valid promissory note in Alabama has to satisfy the state’s version of the Uniform Commercial Code and stay within its interest rate limits. Under Alabama Code Section 7-3-104, the document must contain an unconditional promise to pay a fixed amount of money, be payable to a specific person or to the bearer, be payable on demand or at a definite time, and require nothing of the maker beyond paying money. The maker has to sign it. Those are the Alabama promissory note requirements at their core, and a document missing any of them may still work as a basic contract but loses the streamlined enforcement and transferability that come with negotiable instrument status.
The UCC Elements in Plain Terms
The unconditional promise is the piece people get wrong most often. A note that says “I’ll pay you $10,000 once I sell my house” has a condition baked in, and that condition destroys negotiability. The promise to pay cannot depend on some other event happening first.1Legal Information Institute. Uniform Commercial Code 3-104 – Negotiable Instrument
The amount has to be fixed. The payee has to be identified at the time the note is issued, or the note has to be payable to whoever holds it. The timing has to be either on demand or at a specific date. And the note cannot obligate the maker to do anything other than pay, though provisions about maintaining collateral or allowing the holder to act after default are allowed.
No one is liable on a promissory note unless they signed it or an authorized agent signed for them.2Alabama Legislature. Alabama Code Title 7 Article 3 Part 3 – Holder in Due Course Without a signature from the maker, the note cannot be enforced against them.
Interest Rate Limits
Alabama’s usury rules have layers, and the practical answer turns on how big the loan is.
Under Alabama Code Section 8-8-1, if the parties never put a rate in writing, interest defaults to 6 percent per year. If they do put a rate in writing, the ceiling under this general provision is 8 percent per year.3Alabama Legislature. Alabama Code 8-8-1 – Maximum Rates of Interest – Generally
That ceiling largely disappears once the loan gets bigger. Section 8-8-5 says that when the original principal balance is $2,000 or more, the parties can agree to whatever rate they want, and neither the borrower nor any guarantor or successor can raise a usury defense.4Alabama Legislature. Alabama Code 8-8-5 – Maximum Rates of Interest – Loans, Credit Sales, Etc., of 2,000 or More Because most notes clear that threshold, the general cap matters most for small personal loans.
When a loan does fall under the cap and the rate is too high, the penalty is severe. A usurious contract cannot be enforced beyond the principal balance. The borrower owes nothing in interest, any interest already paid is credited against the remaining principal, and the lender’s judgment is limited to whatever principal is still outstanding.5Alabama Legislature. Alabama Code 8-8-1 – Rate of Interest; Usury For loans under $2,000, document the rate carefully and keep it within the written-agreement cap of 8 percent.
Clauses Worth Adding Beyond the Minimum
Meeting the UCC’s elements makes a note valid. A handful of extra provisions decide how useful it is when something goes wrong.
Repayment schedule. Spell out whether the borrower pays monthly installments, a single lump sum at maturity, or something else. Ambiguity about timing invites disputes.
Default definition. Identify precisely what counts as a default. Missing a payment is the obvious trigger, but the note can also treat events like the borrower failing to insure collateral, or filing for bankruptcy, as defaults.
Acceleration clause. This lets the lender demand the entire remaining balance after a default, instead of suing on each installment as it comes due. A note without acceleration language forces the lender into a slow, piecemeal collection process.
Attorney fee provision. Alabama allows these within limits. For consumer credit transactions over $300 in original amount financed, the note can require the borrower to pay reasonable attorney fees up to 15 percent of the unpaid debt after default and referral to an outside attorney. For transactions over $10,000 or those secured by real property, the creditor can also require the borrower to pay attorney fees incurred during closing or modification of the loan.6Alabama Legislature. Alabama Code 5-19-10 – Contract Provisions for Attorneys Fees
Governing law clause. Specifying that Alabama law governs the note heads off confusion when the parties live in different states or the collateral sits elsewhere.
Unsecured, Secured, and Demand Notes
An unsecured note rides entirely on the borrower’s promise. If the borrower defaults, the lender’s only path is a civil lawsuit for breach of contract. A secured note is backed by collateral that the lender can pursue to recover the debt.
Repayment structure is a separate choice. An installment note calls for scheduled payments over the life of the loan. A demand note has no fixed maturity and becomes due whenever the lender asks. Demand notes are common in informal lending between relatives or business associates, and the open-ended timing creates risk on both sides, especially under the statute of limitations rules below.
Securing the Note With Collateral
A secured promissory note requires more than the note itself. The lender needs a separate security agreement granting an interest in specific property, and that interest has to be “perfected” to have priority over other creditors.
Personal Property
For personal property like equipment, vehicles, inventory, or accounts receivable, the lender perfects the security interest by filing a UCC-1 financing statement. In Alabama, the proper filing office for most collateral types is the Secretary of State’s UCC Division in Montgomery.7Alabama Secretary of State. Uniform Commercial Code After a default, the secured party can repossess the collateral without going to court, provided repossession does not involve a breach of the peace.8Legal Information Institute. Uniform Commercial Code 9-609 – Secured Partys Right to Take Possession After Default
Real Property
When real estate secures the note, the lender takes a mortgage. Alabama requires mortgages to be recorded in the county where the property sits.9Alabama Legislature. Alabama Code 35-4-62 – Locations for Recording Recording establishes priority and puts future buyers and creditors on notice. Alabama also imposes a mortgage recording tax of $0.15 per $100 of the initial indebtedness, rounded up to the next $100. On a $200,000 loan, the recording tax alone comes to $300, before page fees and other charges.
How Long the Lender Has to Sue
Alabama caps how long a lender can wait before filing suit on a promissory note, and the rule depends on the type of note.
For a note payable at a definite time, the lender has six years after the due date to sue. If the lender accelerated the note after a default, the clock runs from the accelerated due date. For a demand note where the lender actually demands payment, the six-year window starts on the date of the demand.
Demand notes carry a separate trap. If no demand is ever made and no principal or interest is paid for a continuous stretch of 10 years, the note becomes unenforceable entirely.10Justia. Alabama Code 7-3-118 – Statute of Limitations A relative lends money informally, never presses for repayment, and a decade later finds out the note is dead. If you hold a demand note, making or accepting even a small payment inside each 10-year window keeps it alive.
Enforcing the Note After Default
When a borrower stops paying, the path depends on what the note says and whether it is secured. The usual first step is a written notice of default. If the note includes an acceleration clause, that notice demands the full remaining balance. Without acceleration language, the lender has to chase each missed payment as it comes due.
For a secured note backed by personal property, the lender can repossess the collateral through court action or self-help, as long as repossession happens without a breach of the peace.8Legal Information Institute. Uniform Commercial Code 9-609 – Secured Partys Right to Take Possession After Default The lender then sells the collateral in a commercially reasonable manner and applies the proceeds to the debt. If the sale falls short, the lender can pursue a deficiency judgment for the balance.
For an unsecured note, the only recourse is a breach of contract lawsuit. Once the lender has a judgment, Alabama’s collection tools, including wage garnishment and property liens, come into play to recover principal, accrued interest, and any attorney fees the note allows.
A Note on Federal Tax Rules
Private promissory notes between individuals, or between a business and its owners, carry a federal tax wrinkle that state law does not address. When you lend at an interest rate below the IRS Applicable Federal Rate, the IRS treats the shortfall as if the lender transferred that amount to the borrower and the borrower paid it back as interest, producing phantom income for both sides.11Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
The AFR changes monthly and varies by loan term. For January 2026, the IRS set the short-term rate (loans of three years or less) at 3.63 percent, the mid-term rate (over three to nine years) at 3.81 percent, and the long-term rate (over nine years) at 4.63 percent, using annual compounding.12Internal Revenue Service. Revenue Ruling 2026-2 For gift loans directly between individuals, the imputed interest rules do not apply if the total outstanding balance stays at or below $10,000, unless the borrower uses the money to buy income-producing assets.11Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates Set the stated rate on your note at or above the applicable AFR when the note is signed and you avoid the issue entirely.