Lending or borrowing money—even among friends or family—should always be backed by a written agreement. In Alberta, a promissory note offers a simple, legally binding way to formalize a loan, clearly outlining the borrower’s promise to repay a specific amount to the lender.
Used in everything from personal loans to small business financing, promissory notes help avoid misunderstandings and protect both parties if repayment issues arise.
What Is a Promissory Note?
A promissory note is a written document confirming a borrower’s obligation to repay a loan under specified terms. It includes key details like the loan amount, repayment schedule, interest rate (if any), and signatures. Compared to complex loan agreements, it’s easier to create and ideal for:
- Loans between friends or family
- Informal personal or business lending
- Short-term or smaller loan arrangements
Promissory notes can be either:
- Secured – backed by collateral (e.g., a vehicle or property)
- Unsecured – based solely on the borrower’s promise to repay
When Should You Use One?
Promissory notes are best suited for low- to moderate-risk loans between trusted parties. For larger loans or high-risk situations, a formal loan agreement with more detailed legal protections may be more appropriate.
Key Elements of a Valid Promissory Note in Alberta
To ensure a promissory note is legally enforceable in Alberta, include the following:
1. Names and Contact Details
Include the full legal names and mailing addresses of both borrower and lender. Email or phone numbers are optional but can help maintain communication.
2. Loan Amount
Clearly state the principal amount in both numbers and words, and specify the currency if needed.
3. Repayment Terms
Outline how the loan will be repaid—whether in full, in installments, or on demand. Include payment method (e.g., e-transfer, cheque) and due dates.
4. Interest Rate
If interest is charged, include the annual percentage rate (APR) and ensure it doesn’t exceed 60% annually, per Section 347 of the Criminal Code of Canada. Also state whether it’s a fixed or variable rate, and whether interest is simple or compound.
5. Default Terms
Specify what happens if the borrower misses payments—this could include late fees, added interest, or legal action. If the loan is secured, clearly identify the collateral and explain the lender’s right to recover it in case of default.
6. Signatures and Witnesses
The borrower must sign the note for it to be enforceable. While not always required, the lender’s signature and a witness or notary (especially for larger loans) can add an extra layer of protection.
7. Governing Law
Include a clause confirming that the agreement is governed by Alberta law. This is important if the parties live in different provinces or the loan involves assets outside Alberta.
Can You Change a Promissory Note?
Yes—but only if both parties agree in writing. You can draft an amendment referencing the original note, or create a new note altogether if multiple changes are needed. Avoid informal or verbal changes, as they may not be legally enforceable.
If the note is secured, be sure to properly update any collateral agreements or registrations.
What If the Borrower Defaults?
Default occurs when a borrower fails to repay the loan according to the agreed terms. The consequences depend on whether the note is secured or unsecured:
- Secured loans: The lender may seize the collateral or initiate legal steps to recover it.
- Unsecured loans: The lender can sue for the unpaid amount.
Initial steps often include a demand letter requesting repayment. If that fails, legal action can be filed in:
- Alberta Court of Justice for claims under $100,000
- Court of King’s Bench for larger claims
A successful claim may allow the lender to garnish wages, freeze bank accounts, or place a lien on property. Keep in mind Alberta’s two-year limitation period to initiate a lawsuit from the date of default.
Enforcing a Promissory Note
Lenders should first try to resolve issues informally. If that doesn’t work, having a well-documented promissory note—and records of payments or communication—can be essential in court.
A properly drafted promissory note gives you a strong legal foundation if enforcement becomes necessary.
Get Legal Help for Peace of Mind
While promissory notes are simpler than full loan agreements, they are still legal contracts—and mistakes can make them unenforceable. Vague terms, missing signatures, or illegal interest rates can all create serious problems.
If you’re lending or borrowing money, especially with larger amounts or collateral involved, it’s wise to have a lawyer draft or review your promissory note.
Need help drafting or reviewing a promissory note in Alberta?
Our business contract lawyers can help you create a legally sound agreement that protects your financial interests and ensures clarity for both parties.
Disclaimer: This article is for informational purposes only and is not legal advice. Please consult a lawyer if you need assistance drafting or reviewing a promissory note for your specific circumstances. See our Terms of Use for more details.