A secured promissory note in California is valid and enforceable only when the written promise to repay, the collateral pledge, and the public filing that protects the lender all line up with specific state rules. The California requirements for a secured promissory note fall into three groups: terms that must appear in the note itself, a security agreement that attaches the lender’s interest to identified collateral, and a perfection step (usually a UCC-1 filing or a recorded deed of trust) that protects that interest against everyone else. Miss any of the three and the document may still bind the borrower personally while leaving the lender unsecured in practice.
What the Note Itself Must Contain
The note is the borrower’s written promise to repay. It should identify every lender, borrower, and guarantor by full legal name and contact information. If a party is a business entity, use the exact name registered with the California Secretary of State. For multiple borrowers, a joint and several liability clause lets the lender pursue any one borrower for the full balance rather than chasing proportional shares. For guarantors, the note should state whether each guarantor is on the hook for the entire balance or only a defined portion.
Principal, Interest, and the California Usury Cap
The note must state the principal amount, the interest rate, and when payments are due. California’s Constitution caps interest at 10% per year on loans made by non-exempt lenders for personal, family, or household purposes.1State of California Department of Justice. California Constitution Article 15 – Usury The cap does not apply to banks, credit unions, licensed real estate brokers arranging loans secured by real property, or several other categories the Constitution exempts. Business-to-business loans from non-exempt lenders follow a different ceiling tied to the Federal Reserve discount rate.
Specify whether payments are due in installments or as a lump sum at maturity, and whether prepayment is allowed. If a prepayment fee applies, state the amount.
Acceleration
An acceleration clause lets the lender demand the full remaining balance after a qualifying default. Without one, the lender can only collect installments as they come due. Acceleration generally does not trigger automatically; the lender chooses whether to invoke it. A borrower who cures the default before the lender accelerates defeats acceleration on that breach. Once the lender does accelerate, the borrower owes the unpaid principal plus interest accrued through acceleration, not interest that would have accumulated through the original maturity date.
Late Fees
Late fees are enforceable in California only if they reflect a reasonable estimate of the lender’s actual damages, not a penalty. For consumer loans, Civil Code Section 1671 presumes a late fee is unenforceable unless the lender can show that calculating the actual harm would be impractical and that the fee amount was reasonable when the contract was signed.2California Legislative Information. California Civil Code 1671 – Liquidated Damages Business loans get more leeway; the fee is presumed valid unless the borrower proves it was unreasonable. Late fees on private loans typically run between 2% and 6% of the overdue payment.
The Security Agreement
The note creates the debt. The security agreement creates the lien. Under California Commercial Code Section 9203, a security interest is enforceable only when three conditions are met: the lender has given value (typically by disbursing the loan), the borrower has rights in the collateral, and the borrower has signed a security agreement describing the collateral.3California Legislative Information. California Commercial Code 9203 – Effectiveness of Security Agreement
Collateral descriptions need to be specific. For equipment, include serial numbers and model information. For real estate, use the legal description from the deed. Vague descriptions invite disputes about which assets the lender actually has rights in.
The agreement should also address the borrower’s duty to maintain and insure the collateral. Lenders routinely require insurance coverage naming them as loss payees, so insurance proceeds flow to the outstanding debt if the collateral is damaged or destroyed. A borrower who lets insurance lapse or damages the collateral through neglect is typically in breach, giving the lender grounds to act even without a missed payment.
Cross-Collateralization
A cross-collateralization clause ties collateral from one loan to obligations under other loans between the same parties. If the borrower defaults on any linked loan, the lender can reach all pledged assets, including collateral for loans that are current. Borrowers who sign one should negotiate carve-outs rather than accept blanket language covering “all obligations now or in the future.”
Priority and Subordination
When multiple creditors claim the same collateral, the order in which their interests were perfected generally determines who gets paid first. An unperfected security interest is subordinate to a creditor who perfected earlier or to a buyer who took the collateral without knowledge of the lien.4California Legislative Information. California Commercial Code 9317 – Interests That Take Priority Over Unperfected Security Interests If collateral already carries a prior lien, lenders often require a subordination agreement from the prior lienholder before funding.
Perfecting the Security Interest
Signing a security agreement gives the lender rights against the borrower. Perfection is what protects those rights against everyone else. For most personal property, perfection means filing a UCC-1 financing statement with the California Secretary of State. For real estate, it means recording a deed of trust with the county recorder.
What the UCC-1 Must Say
The financing statement needs the debtor’s full legal name, the secured party’s name and address, and a description of the collateral. The collateral description can be broader than in the security agreement, but it still must be specific enough to let a searcher identify the assets.
The debtor name is where filings most often fail. If the borrower is a registered business entity, the name must match the exact registration on file with the Secretary of State. For individuals, the name must match the California driver’s license or state ID.5California Legislative Information. California Commercial Code 9503 – Name of Debtor and Secured Party A filing under a trade name alone is not enough. Name errors can render the filing ineffective, leaving the lender unperfected and subordinate to later creditors.
Fees and Duration
California charges $5 for electronic UCC-1 filings and $10 for paper filings of one to two pages. Paper filings of three or more pages cost $20. An additional $6 special handling fee applies for documents submitted at the Secretary of State’s public counter.6California Secretary of State. UCC Fee Schedule
A UCC-1 is effective for five years from the date of filing.7California Legislative Information. California Commercial Code 9515 – Duration and Effectiveness of Financing Statement After lapse, the security interest is unperfected and treated as if it had never been perfected against purchasers for value. To keep the filing alive, the lender files a UCC-3 continuation statement within the six-month window before the five-year expiration. One day late means starting over with a new UCC-1, and any priority tied to the original filing can be lost.
Name Changes
If the borrower legally changes names after the UCC-1 is filed, the lender has four months to file an amendment. During those four months, the original filing still covers collateral the borrower acquires. After four months, the filing becomes ineffective as to newly acquired collateral unless the lender has updated it.8California Legislative Information. California Commercial Code 9507 – Effect of Certain Events on Effectiveness of Financing Statement This deadline is easy to miss when a business borrower restructures or rebrands.
Real Property: The Deed of Trust
When the collateral is real estate, the lender records a deed of trust with the county recorder for the county where the property sits. Priority among real property lienholders generally follows recording order.
How Later Enforcement Shapes the Note You Write Now
Two California rules reach back into drafting decisions, because they limit what the lender can collect after things go wrong.
Anti-Deficiency Rules
A deficiency is the gap between what the borrower owes and what the lender recovers from the collateral. California restricts the lender’s right to pursue that gap on real-property loans in two significant ways.
After a nonjudicial foreclosure (trustee’s sale), the lender cannot pursue a deficiency judgment against the borrower on the note secured by the foreclosed property.9California Legislative Information. California Code of Civil Procedure 580d – Deficiency After Power of Sale The sale is the lender’s only recovery on that note. Guarantors may still be liable for the deficiency under the same statute.
Purchase money loans receive broader protection. No deficiency judgment is allowed on a loan used to finance the purchase of a dwelling of four or fewer units if the borrower occupies the property, regardless of whether the foreclosure is judicial or nonjudicial.10California Legislative Information. California Code of Civil Procedure 580b – Purchase Money Mortgage Deficiency Refinances of purchase money loans retain anti-deficiency protection, except to the extent the borrower pulled new cash out beyond the original balance.
The drafting takeaway: choosing nonjudicial foreclosure is faster and cheaper but forfeits the right to collect any remaining balance. A lender who anticipates that the collateral may not cover the debt should weigh whether judicial foreclosure, slower and more expensive, is worth preserving the right to a deficiency judgment.
Statute of Limitations
Under Code of Civil Procedure Section 337, the statute of limitations for an action on a written contract is four years from the date the cause of action accrues. For an installment note, the clock typically starts on each missed payment, though acceleration collapses the balance into a single claim with a single limitations period. Filing a lawsuit, recording a notice of default for a real property foreclosure, or obtaining a written acknowledgment of the debt from the borrower can interrupt or restart the clock in certain circumstances. Wait too long and the borrower can raise the statute of limitations as a complete defense.
Repossession and Foreclosure Mechanics the Note Should Anticipate
Default usually means a missed payment, but the security agreement defines what else counts, such as failure to insure the collateral, unauthorized use, or insolvency. Define it carefully in the agreement, because the definition controls.
After default on personal property collateral, the lender can take possession through court proceedings or through self-help repossession, provided repossession happens without a breach of the peace.11California Legislative Information. California Commercial Code 9609 – Secured Party Right to Take Possession After Default The lender cannot use force, threats, or trickery, and must stop if the borrower objects in person. If self-help is not feasible, the lender can seek a court order compelling surrender.
Before selling repossessed collateral, the lender must send the borrower reasonable written notice describing the planned disposition.12California Legislative Information. California Commercial Code 9611 – Notification Before Disposition of Collateral The sale must be commercially reasonable. The borrower can redeem the collateral any time before the sale by paying the outstanding balance plus the lender’s reasonable expenses and attorney fees.13California.Public Law. California Commercial Code 9623 – Right to Redeem Collateral
For real property, nonjudicial foreclosure under Civil Code Section 2924 begins when the lender or trustee records a notice of default with the county recorder. At least three months must pass before a notice of sale can issue, and the sale cannot occur until at least 20 days after the notice of sale is published and posted.14California Legislative Information. California Civil Code 2924 – Mortgages Power of Sale The borrower’s right to reinstate by curing the arrears expires five business days before the trustee’s sale.15California Legislative Information. California Civil Code 2924c – Cure of Default
Most well-drafted notes include a notice-and-cure provision. California’s Commercial Code does not require a specific cure period for private secured loans, but courts are more receptive to enforcement when the borrower had a fair chance to fix the problem first.
Transfers and Assignments
Unless the note prohibits it, the lender can sell or assign both the note and the security interest. Transferring the note requires endorsing it and delivering it, physically or constructively, to the new holder.16California Legislative Information. California Commercial Code 3203 – Transfer of Instrument The security interest must be assigned separately through an assignment of the security agreement. If a UCC-1 is on file, submit a UCC-3 amendment reflecting the new secured party. For real estate, record an assignment of the deed of trust with the county recorder. Maintaining an unbroken chain of properly documented transfers is a prerequisite to later enforcement.
Federal Disclosures for Consumer Loans
Private lenders making consumer loans in California may have federal disclosure duties on top of state requirements. The Truth in Lending Act and Regulation Z require specific written disclosures of rates, fees, and repayment terms for most consumer credit transactions. As of January 1, 2026, loans of $73,400 or less made primarily for personal, family, or household purposes are covered, and the lender must deliver a standardized disclosure before the borrower becomes obligated.17Consumer Financial Protection Bureau. Truth in Lending Regulation Z Threshold Adjustments Business-purpose loans are generally exempt. Violations can trigger statutory damages and rescission rights that unwind the note, so confirm whether TILA applies before closing a consumer loan.