California 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 used primarily for personal, family, or household purposes, California caps interest at 10% per year. For other loans (such as a loan to a business), the cap is the higher of 10% or 5% plus a floating rate tied to the Federal Reserve Bank of San Francisco's discount rate. (Cal. Const. Art. XV, Section 1)

3. 3

   Several categories of lender, including banks, credit unions, licensed finance lenders, and real estate brokers arranging loans secured by real property, are constitutionally exempt from the usury cap entirely. The cap applies to the general private person-to-person loan, not to every lender.

4. 4

   A California promissory note does not need to be notarized or witnessed to be enforceable. California Commercial Code Section 3104 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.

5. 5

   Confession-of-judgment clauses, which would let the payee obtain a court judgment against the maker without filing a lawsuit, are banned in California as of January 1, 2023. A judgment by confession is unenforceable and cannot be entered in any California superior court. (Cal. Code Civ. Proc. Section 1132)

6. 6

   You generally have 4 years from a missed payment or the note's stated due date to sue to collect on a written promissory note in California. (Cal. Code Civ. Proc. Section 337)

7. 7

   If a California promissory note is secured by personal property rather than real property, the lender generally needs to file a UCC-1 financing statement with the California Secretary of State to protect its priority against other creditors. (Cal. Com. Code Section 9310)

California Requirements for Promissory Note

• Maximum Legal Interest Rate (California Constitution Article XV, Section 1)

  For a loan primarily for personal, family, or household purposes, the maximum is 10% per annum. For other loans, the maximum is the higher of 10% per annum or 5% plus the Federal Reserve Bank of San Francisco discount rate. The default statutory rate absent a written contract rate is 7% per annum.

• Statute of Limitations (California Code of Civil Procedure § 337)

  Generally 4 years from a missed payment or the note's stated due date to sue to collect on a written promissory note.

• Negotiability Requirements (California Commercial Code § 3104)

  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.

• Confession of Judgment Banned (California Code of Civil Procedure Section 1132)

  As of January 1, 2023, a judgment by confession is unenforceable and cannot be entered in any California superior court. A promissory note should not include a confession-of-judgment or cognovit clause.

• Exempt Lender Categories (California Constitution Article XV, Section 1)

  Numerous categories of lender, including banks, credit unions, industrial loan companies, licensed pawnbrokers, licensed personal property brokers, licensed finance lenders, and real estate brokers arranging loans secured by real property liens, are constitutionally exempt from the usury cap entirely. The cap applies to the general private person-to-person loan.

• Secured Transaction Filing (California Commercial Code Section 9310)

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

• California Financing Law Compliance (California Financial Code § 22000 et seq.)

  California Financing Law licensing and disclosure requirements apply only to a lender "engaged in the business of" making consumer or commercial loans. An isolated private person-to-person promissory note does not trigger these requirements.

• Notarization Not Required for Validity (California Commercial Code Section 3104)

  California does not require a promissory note to be notarized or witnessed to be enforceable. Commercial Code Section 3104'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.