A promissory note in Texas is enforceable when it contains an unconditional promise to pay a fixed sum of money, on demand or at a definite time, to a named payee or to bearer. Those four elements come from Section 3.104 of the Texas Business and Commerce Code and make the note a negotiable instrument. Meeting the Texas promissory note requirements for negotiability is the floor; a workable note also sets a lawful interest rate, spells out repayment and default, and gets signed in a way that will hold up if the borrower stops paying.
The Four Statutory Elements
Section 3.104 of the Texas Business and Commerce Code lists what a note must contain to qualify as a negotiable instrument:1State of Texas. Texas Business and Commerce Code 3.104 – Negotiable Instrument
- An unconditional promise to pay. If repayment depends on another event happening first, the note loses negotiable status.
- A fixed amount of money. The principal has to be a specific dollar figure; interest and other charges can be added on top.
- Payable on demand or at a definite time. The note must state that the lender can call the balance at any time, or that payment is due on a specific date or schedule.
- Payable to order or to bearer. The note must name a specific payee (“pay to the order of Jane Smith”) or state that it is payable to whoever holds it.
A note that misses any of these can still be enforced as an ordinary contract, but it won’t carry the streamlined enforcement and transfer rights that come with negotiable instrument status. The statute does allow the note to include provisions about collateral, the holder’s right to dispose of collateral, and certain waivers without losing negotiability.
Terms to Add Beyond the Minimum
The statutory four get you a negotiable instrument. A note that will actually survive a dispute needs more.
Put in the full legal names and addresses of both the borrower and the lender. Add the date the note is signed, and the date repayment begins if that is different.
Spell out the repayment structure. For installment notes, state the payment amount, the day of the month it is due, and the date of the final payment. For a single-payment note, state the due date. For a demand note, make clear the lender can call the balance at any time.
Address late fees directly. On notes charging 10 percent annual interest or less, Texas law caps the delinquency charge at the greater of 5 percent of the overdue payment or $7.50, and the payment must be at least 10 days late before the charge applies.2State of Texas. Texas Finance Code 302.001 – Usurious Interest Notes using the higher Chapter 303 ceilings follow different rules. Either way, write the late fee terms into the note so there is no argument later about what the borrower agreed to.
Include an attorney’s fees clause. Texas courts generally enforce these provisions, and without one, a lender who sues for nonpayment may not recover the cost of hiring counsel. A single sentence saying the borrower agrees to pay reasonable attorney’s fees and collection costs on default is standard.
Interest Rate Rules and Usury Limits
Texas regulates interest through Chapters 302 and 303 of the Finance Code, and the penalties for charging too much are stiff enough that every lender should check the rate before signing.
Default and Baseline Rate
When a note does not specify an interest rate, the lender can charge 6 percent per year, but only starting 30 days after the payment is due.3State of Texas. Texas Finance Code 302.002 – Accrual of Interest When No Rate Specified If the parties agree on a rate, the baseline cap is 10 percent per year. Anything above 10 percent is usurious unless the parties opt into one of the Chapter 303 variable ceilings.2State of Texas. Texas Finance Code 302.001 – Usurious Interest
Chapter 303 Ceilings
Chapter 303 lets a written agreement use a floating ceiling that adjusts with economic conditions. The Office of Consumer Credit Commissioner publishes the ceilings weekly. The variations differ, but they share the same floor and cap: the ceiling cannot drop below 18 percent, and it cannot exceed 24 percent. For loans made for business, commercial, or investment purposes, the cap rises to 28 percent.4State of Texas. Texas Finance Code 303.009 – Maximum and Minimum Ceilings
What Usury Costs
Charging more than the law allows carries real consequences. For consumer loans, the borrower can recover three times the excess interest, or a minimum penalty of $2,000 or 20 percent of the principal (whichever of those two is less). For commercial loans, the penalty is three times the excess interest with no minimum alternative.5State of Texas. Texas Finance Code 305.001 – Liability for Usurious Interest Penalties are calculated on the gap between what the lender charged and what was allowed. When in doubt, staying at or below 10 percent avoids the Chapter 303 analysis entirely.
Federal Tax Rules on Private Loans
Lenders who skip interest when loaning to family or friends run into the IRS. Under Section 7872 of the Internal Revenue Code, a loan carrying interest below the applicable federal rate is treated as a below-market loan, and the IRS imputes the missing interest as if it had been paid.6Office of the Law Revision Counsel. 26 U.S. Code 7872 – Treatment of Loans With Below-Market Interest Rates The lender ends up taxed on interest income they never actually received.
There is a meaningful exception for small gift loans between individuals. If the total outstanding balance between the borrower and lender stays at or below $10,000, Section 7872 does not apply. That exception disappears if the loan is used to buy income-producing assets like rental property or stocks. For loans above $10,000, charging at least the applicable federal rate (published monthly by the IRS) avoids the imputed interest problem.
If the lender later forgives $600 or more of the outstanding debt, the IRS requires the lender to file Form 1099-C reporting the canceled amount.7Internal Revenue Service. About Form 1099-C, Cancellation of Debt The borrower may need to report the forgiven debt as taxable income. This catches people off guard in family lending, where forgiveness feels like a gift rather than a taxable event.
Securing the Note With Collateral
An unsecured note gives the lender the right to sue, but if the borrower has no assets or files bankruptcy, that right may be worth little. Collateral gives the lender a priority claim on specific property.
Real Estate
When real property secures the note, the parties execute a Deed of Trust alongside the note. The Deed of Trust names a third-party trustee who holds the power of sale, meaning the trustee can conduct a non-judicial foreclosure if the borrower defaults. The Deed of Trust is recorded in the county clerk’s office where the property sits; the promissory note itself is not recorded and stays with the lender.
If foreclosure becomes necessary, Texas requires at least 20 days’ written notice to the borrower to cure the default, followed by at least 21 days’ notice before the foreclosure sale.8State of Texas. Texas Property Code 51.002 – Sale of Real Property Under Contract Lien Non-judicial foreclosure is faster and cheaper for the lender than going through court.
Personal Property
For notes secured by equipment, vehicles, inventory, or other personal property, the lender needs a written security agreement that describes the collateral. To make that interest enforceable against other creditors, the lender files a UCC-1 Financing Statement with the Texas Secretary of State.9Texas Secretary of State. About the Uniform Commercial Code The filing fee is $5,10Texas Secretary of State. Uniform Commercial Code – Fees and the financing statement is effective for five years, after which it must be renewed if the debt is still outstanding.11Legal Information Institute. UCC 9-515 – Duration and Effectiveness of Financing Statement
Perfecting the security interest through a UCC filing is the step private lenders most often skip. Without it, a later creditor could claim the same collateral and win, or the borrower could sell the property free of the lender’s interest.
Default and Acceleration
An acceleration clause lets the lender declare the entire remaining balance due immediately if the borrower misses a payment or breaches another term. Without one, the lender can only sue for each missed installment as it comes due.
Texas courts enforce acceleration clauses but generally require two separate steps. First, the lender sends a notice of intent to accelerate, telling the borrower they are in default and giving them a chance to cure. If the borrower does not cure, the lender then sends a notice of acceleration declaring the full balance due. Some notes try to waive these notices, but Texas courts tend to require them anyway when the contract language is ambiguous. Building both notices into the note’s default provisions avoids that fight.
Once the balance is accelerated, the lender’s remedy depends on whether the note is secured. For notes backed by real property, the lender proceeds with foreclosure under the Deed of Trust. For notes backed by personal property, the lender can repossess and sell the collateral under the UCC security agreement. For unsecured notes, the remedy is a lawsuit for the full balance, plus interest, late fees, and attorney’s fees if the note includes those terms.
The Four-Year Deadline to Sue
A lender cannot wait indefinitely. The statute of limitations on a debt action in Texas is four years from the date the cause of action accrues.12State of Texas. Texas Civil Practice and Remedies Code 16.004 – Four-Year Limitations Period For a note payable on a specific date, the clock starts when the borrower misses that payment. For an installment note, each missed payment starts its own four-year window, unless the lender accelerates the balance, which starts a single four-year clock on the entire debt.
This is where acceleration becomes a trap. Once you accelerate, the clock runs on everything. Lenders who accelerate out of frustration and then try to negotiate informally for years sometimes find they have run out of time to sue.
For demand notes where the lender never actually demands, the limitations question is less settled. The safest approach is to treat the four-year period as starting on the date of the note, or at the latest, on the date the lender first demands payment.
Signing, Notarizing, and Keeping the Original
Both parties should sign. The borrower’s signature creates the promise to pay; the lender’s confirms the terms and prevents later claims that the lender altered the note after execution.
Notarization is not legally required for a promissory note to be enforceable in Texas, but it is a practical safeguard. A notary verifies each signer’s identity and confirms they signed voluntarily, which takes forgery and duress claims off the table. Texas caps notary fees at $10 for the first signature and $1 for each additional signature.13Texas Secretary of State. Notary Public Educational Information
After signing, the lender keeps the original note in a secure location. The original is the primary evidence of the debt and is necessary to enforce the note in court. The borrower should receive a copy.
Transferring the Note
One advantage of a negotiable note is transferability. If the note is payable “to the order of” a named person, the lender endorses the back (much like a check) and delivers it to the new holder. The new holder then has the right to collect payments and to sue for nonpayment in their own name.
For a borrower, this means the person collecting payments down the road may not be the one who originally made the loan. For a lender, a note that fails the Section 3.104 negotiability requirements cannot be transferred as cleanly, and the new holder may inherit whatever defenses the borrower had against the original lender.1State of Texas. Texas Business and Commerce Code 3.104 – Negotiable Instrument Whether to include or exclude a transfer provision is a decision both sides should think through before signing.