Alabama Promissory Note

Introduction

Key Things to Know

1. 1

   A promissory note is a written, signed promise by one party (the maker) to pay a definite sum of money to another party (the payee), either on demand or by a set date.

2. 2

   For a loan or forbearance with an original principal balance of $2,000 or more, Alabama Code Section 8-8-5 lets the parties agree to any interest rate, with no statutory usury cap at all. Below $2,000, the maximum is 8% per year by written contract, or 6% per year without one (Alabama Code Section 8-8-1). A lender who charges more than the applicable cap on a sub-$2,000 loan forfeits all interest and can recover only the principal (Alabama Code Section 8-8-12).

3. 3

   An Alabama promissory note does not need to be notarized or witnessed to be enforceable. Alabama Code Section 7-3-104, the state's version of the Uniform Commercial Code's negotiable-instrument rules, lists what makes a note a valid negotiable instrument (an unconditional promise, a fixed amount, a signature, payable on demand or by a definite date), and notarization isn't one of the requirements.

4. 4

   Confession-of-judgment clauses, which would let the payee obtain a court judgment against the maker without filing a lawsuit, are void in Alabama. Any agreement to confess judgment made before a lawsuit is filed is void, and a judgment entered on one can be set aside on motion within six months of entry. (Alabama Code Section 8-9-11)

5. 5

   You generally have 6 years from a missed payment or the note's stated due date to sue to collect on a written promissory note in Alabama. (Alabama Code Section 6-2-34)

6. 6

   If an Alabama promissory note is secured by personal property rather than real property, the lender generally needs to file a UCC-1 financing statement with the Alabama Secretary of State to protect its priority against other creditors. (Alabama Code Section 7-9A-310)

7. 7

   Promissory notes are commonly used in Alabama for family loans, business loans, and loans between friends. An isolated private loan generally doesn't trigger the licensing or disclosure rules of the Alabama Consumer Credit Act, known as the Mini-Code, which apply only to a creditor who regularly extends credit more than 25 times a year. (Alabama Code Section 5-19-1)

Alabama Requirements for Promissory Note

• Maximum Legal Interest Rate (Alabama Code Section 8-8-1)

  For a loan or forbearance with an original principal balance under $2,000, the maximum rate of interest is 8% per annum by written contract, or 6% per annum if no rate is fixed in writing. A lender who charges above the applicable cap forfeits all interest and can recover only the principal (Alabama Code Section 8-8-12).

• Negotiability Requirements (Alabama Code Section 7-3-104)

  To be a valid negotiable instrument, a note must be an unconditional promise to pay a fixed amount, signed by the maker, and payable on demand or at a definite time.

• Notarization Not Required for Validity (Alabama Code Section 7-3-104)

  Alabama does not require a promissory note to be notarized or witnessed to be enforceable. Code Section 7-3-104's list of what makes a note a valid negotiable instrument does not include notarization or witnessing; notarization is optional and used only for evidentiary purposes.

• Statute of Limitations (Alabama Code § 6-2-34)

  Generally 6 years from a missed payment or the note's stated due date to sue to collect on a written promissory note ("actions founded on promises in writing not under seal").

• $2,000 Usury Exemption Threshold (Alabama Code Section 8-8-5)

  For a loan or forbearance with an original principal balance of $2,000 or more, the parties may agree to any interest rate, and Alabama's usury caps do not apply at all. Consumer-protection unconscionability law, including the Mini-Code (Title 5, Chapter 19), still applies to these transactions even though the rate cap itself does not.

• Alabama Consumer Credit Act (Mini-Code) Scope (Alabama Code Section 5-19-1)

  Mini-Code licensing, disclosure, and rate rules apply only to a "creditor" who regularly extends or arranges credit, meaning more than 25 times in the preceding calendar year (or more than 5 times for credit secured by a one-to-four-unit residential structure). An isolated private person-to-person note does not trigger these requirements.

• Confession of Judgment Void (Alabama Code Section 8-9-11)

  Any agreement to confess judgment made before a lawsuit is filed is void in Alabama, and a judgment entered on one is set aside and annulled on motion if made within six months of entry. A promissory note should not include a confession-of-judgment or cognovit clause.

• Secured Transaction Filing (Alabama Code Section 7-9A-310)

  If a note is secured by personal property, the lender generally must file a UCC-1 financing statement with the Alabama Secretary of State to perfect and prioritize its security interest against other creditors.