A California promissory note needs six things to be enforceable: the full names of the borrower and lender, the principal amount, the interest rate, the repayment schedule, default terms, and both parties’ signatures with the date. Get those right and the document is legally binding. But California layers several state-specific rules on top of that basic structure — usury caps, balloon payment notices, anti-deficiency protections, prepayment limits — and missing them can void the interest, delay collection, or wipe out the lender’s remedies entirely.
What Every California Promissory Note Must Contain
The core elements aren’t optional, and vague wording in any of them invites a dispute later.
- Full names and addresses. Use the legal name of the borrower (the “maker”) and lender (the “payee”). For a business, use its registered legal name.
- Principal amount. Write the exact dollar figure both in words and numerals.
- Interest rate. State the annual rate and whether it’s fixed or variable. The rate has to fit inside California’s usury ceiling.
- Repayment terms. Spell out the payment amount, frequency, and final due date.
- Date of execution. The signing date anchors the statute of limitations and fixes which usury ceiling applies.
- Signatures. Both parties sign and date. A promissory note is enforceable between the parties without notarization.
Beyond the essentials, most notes also include late fees, default remedies, prepayment rights, and — if collateral backs the loan — a reference to the security document. Each of those raises California-specific issues addressed below.
Interest Rate Limits Under California Usury Law
California caps what a private lender can charge. The limits come from Article XV, Section 1 of the state Constitution, and violating them doesn’t just trim the rate. It can void the entire interest portion of the loan.
Which cap applies depends on the loan’s purpose:
- Personal, family, or household loans: 10% per year on the unpaid balance. A loan used primarily to buy, build, or improve real property does not count as “personal, family, or household,” even if it’s for your own home. That loan falls into the next category.1Justia. California Constitution Article XV Section 1
- All other loans (business, investment, or real property purchase): The greater of 10% per year, or 5% plus the Federal Reserve Bank of San Francisco’s discount rate on the 25th day of the month before the loan closes.1Justia. California Constitution Article XV Section 1
The real property carve-out catches people off guard. A private loan to help a relative buy a house feels personal, but the Constitution treats it like a business loan for usury purposes. Confirm which category applies before you set a rate.
Who Is Exempt From the Usury Cap
The usury limits apply mainly to private individuals and unlicensed lenders. The Constitution exempts banks (state or federally chartered), credit unions, licensed real estate brokers arranging loans secured by real property, licensed personal property brokers, pawnbrokers, and industrial loan companies.1Justia. California Constitution Article XV Section 1 If a bank or licensed mortgage lender is on one side of the note, the caps almost certainly don’t apply. They matter most when one private party lends to another.
Choosing a Repayment Structure
Three structures cover almost every California promissory note.
Installment Payments
The borrower makes regular payments on a set schedule, each covering both principal and interest, and the loan is fully paid off by the final scheduled payment. This is the most predictable structure and the default choice for private loans.
Balloon Payments
The borrower makes smaller periodic payments — often interest only — then pays the remaining principal in one lump sum at the end. Balloon notes are common in seller-financed real estate. They also carry a specific California requirement: if the note is secured by a deed of trust with a term longer than one year, the note holder must mail the borrower written notice between 90 and 150 days before the balloon comes due.2California Legislative Information. California Code CIV Section 2966
The notice must state the amount due (or a good-faith estimate), the due date, where to send payment, and any refinancing rights. The note itself must also contain a printed statement referencing Civil Code Section 2966. If the lender misses the deadline, the balloon due date automatically shifts to 90 days after notice is finally delivered. Interest keeps accruing at the contract rate in the meantime.2California Legislative Information. California Code CIV Section 2966
Demand Notes
A demand note has no fixed maturity date. The full principal and accrued interest come due whenever the lender formally requests payment. Demand notes give the lender flexibility but leave the borrower uncertain about timing, so they suit short-term arrangements between people who trust each other. The statute of limitations starts running from the date of demand. If no demand is ever made and no principal or interest is paid for 10 continuous years, the note becomes unenforceable.
Late Fees, Prepayment, and Acceleration
Late Fees
A late fee clause is a liquidated damages provision under California law. For most non-consumer contracts, the fee is enforceable unless the borrower proves it was unreasonable when the contract was made. For consumer loans (personal, family, or household purposes) and residential leases, the standard flips: the fee is presumed void unless the parties agreed on an amount that reasonably approximates actual damages, and fixing those damages in advance would have been impractical.3California Legislative Information. California Code Civil Code 1671
A 5% late charge on a missed monthly installment can survive scrutiny. A 10% charge applied to an entire balloon payment balance almost certainly won’t. Keep the fee proportional to the administrative burden of a late payment, not the outstanding balance.
Prepayment
Unless the note says otherwise, a California borrower can generally prepay without penalty. For loans secured by owner-occupied residential property of four units or fewer, state law imposes specific limits: a prepayment penalty can only apply during the first five years, the borrower can pay up to 20% of the original principal each year penalty-free, and any penalty on amounts above that 20% cannot exceed six months’ advance interest on the excess.4California Legislative Information. California Code Civil Code 2954.9 After five years, prepayment penalties on these loans are prohibited entirely.
Acceleration
An acceleration clause lets the lender declare the entire remaining balance due immediately if the borrower defaults. These clauses are enforceable, but the lender has to give notice of acceleration before pursuing collection or foreclosure. A clear acceleration clause also starts the statute of limitations on the full balance from the acceleration date rather than each installment’s individual due date.
Secured Notes and the Deed of Trust
A promissory note is either secured, meaning the lender can claim specific collateral if the borrower defaults, or unsecured, resting only on the borrower’s promise to pay.
When real property is the collateral, the note is paired with a separate document called a deed of trust. The deed of trust creates a lien on the property and names a neutral third-party trustee who holds the power of sale if the borrower defaults. This gives the lender access to California’s nonjudicial foreclosure process, which is faster than suing on the note.
An unsecured note relies entirely on the borrower’s creditworthiness. If payments stop, the lender’s only option is to sue for breach of contract, obtain a judgment, and then collect through wage garnishment or property liens.
Signing, Notarization, and Recording
Both parties sign and date the note. The note itself does not need to be notarized to bind the parties. The deed of trust is different. Because it affects title to real property, it must be acknowledged before a notary public before the county recorder will accept it.5California Legislative Information. California Government Code 27287 California notaries can charge up to $15 per signature for an acknowledgment. Recording the notarized deed of trust with the county recorder is what perfects the lender’s security interest, establishing priority against later creditors and buyers. Skip recording and a subsequent buyer or lender could take the property free of the lien.
Enforcing the Note After Default
Collection depends on whether the note is secured or unsecured, and California imposes real restrictions on secured lenders that borrowers should know about before signing.
Unsecured Notes
The lender files a breach of contract lawsuit in California civil court, wins a money judgment, and then uses standard collection tools (wage garnishment, bank levies, liens on non-exempt property) to satisfy the debt.
Secured Notes: Foreclosure and the One-Action Rule
A lender holding a note secured by a deed of trust can initiate nonjudicial foreclosure, which lets the trustee sell the property without going to court. Faster and cheaper than litigation, but the trade-off is significant.
California’s one-action rule requires a lender with a real property security interest to pursue the property first. The lender cannot skip the collateral and sue the borrower personally on the note. The security has to be exhausted.6California Legislative Information. California Code of Civil Procedure Section 726
Anti-Deficiency Protections
If the property sells for less than what the borrower owes, the shortfall is a “deficiency.” California restricts collection of that shortfall in two important situations:
- After nonjudicial foreclosure. If the lender uses the power-of-sale in the deed of trust to foreclose without court involvement, no deficiency judgment is available for any remaining balance. The foreclosure sale is the lender’s only recovery.7California Legislative Information. California Code of Civil Procedure Section 580d
- Purchase money loans. If the deed of trust secures a loan used to buy the property, whether from the seller or a third-party lender financing an owner-occupied dwelling of four units or fewer, no deficiency judgment is allowed regardless of how foreclosure occurs.8California Legislative Information. California Code of Civil Procedure Section 580b
A seller who carries back part of the purchase price with a note secured by a deed of trust generally cannot pursue the buyer for any shortfall after foreclosure. Borrowers should understand these rules before signing personal guarantees or other workarounds that could waive protections they’d otherwise have.
Statute of Limitations
Under California Code of Civil Procedure Section 337, an action on a written instrument must be filed within four years of the due date, or within four years of acceleration if the loan has been accelerated. For demand notes, the four-year clock starts on the date of demand. One narrower deadline: after a nonjudicial foreclosure, any action for a deficiency (where one is even permitted) has to be brought within three months of the sale.9California Legislative Information. California Code of Civil Procedure Section 337
Federal Rules That Sit on Top of the State Note
Below-Market Interest and Imputed Income
If the note’s interest rate falls below the IRS’s Applicable Federal Rate (AFR), the IRS treats the difference as “imputed interest.” The lender owes income tax on interest the IRS assumes was collected, even when it wasn’t. For gift loans between family members, the forgone interest is also treated as a gift from lender to borrower.10Office 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. As of April 2026, the annual rates are 3.59% for short-term loans (three years or less), 3.82% for mid-term loans (three to nine years), and 4.62% for long-term loans (over nine years).11Internal Revenue Service. Rev. Rul. 2026-7 – Applicable Federal Rates Setting the rate at or above the AFR for the month the loan closes avoids imputed interest entirely.
A small-loan exception applies: gift loans of $10,000 or less between individuals are exempt from imputed interest, as long as the money isn’t used to buy income-producing assets.10Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates If the lender later forgives the loan, the forgiven amount counts as a gift. For 2026, the annual gift tax exclusion is $19,000 per recipient, so forgiving a balance up to that amount in a single year triggers no gift tax filing.12Internal Revenue Service. Gifts and Inheritances
Truth in Lending Disclosures
Private lenders making consumer loans may fall under the federal Truth in Lending Act (TILA) and Regulation Z. For 2026, Regulation Z applies to consumer credit transactions of $73,400 or less, and loans secured by real property are covered regardless of the loan amount.13Board of Governors of the Federal Reserve System. Agencies Announce Dollar Thresholds for Applicability of Truth in Lending and Consumer Leasing Rules TILA requires written disclosure of the annual percentage rate, finance charges, total payments, and payment schedule before the borrower signs.
Whether TILA applies to a particular private loan turns on whether the lender is a “creditor” under Regulation Z, which generally requires extending consumer credit regularly or more than a set number of times per year. A one-time loan between family members is unlikely to trigger TILA. A private lender who makes multiple consumer loans or regularly finances property sales should assume it does. Business loans, student loans, and non-real-property loans above $73,400 sit outside Regulation Z coverage.