Promissory note vs loan agreement comes down to one question: how much could go wrong? A promissory note is a short, signed promise by the borrower to repay a fixed sum. A loan agreement is a two-way contract that also covers interest, instalments, security, default and enforcement.
Here’s the awkward truth. Most people pick the document last, after the money has already moved. Someone needs cash, you trust them, and paperwork feels a bit rude. Then a repayment slips or the borrower’s business hits the wall, and the one-page note in your drawer turns out to say very little.
- A promissory note is a one-way promise. Only the borrower (the “maker”) signs, and Australian law requires it to be an unconditional promise to pay a fixed sum.
- A loan agreement is a two-way contract. Both parties sign it, and it can deal with interest, instalments, security, default events and recovery costs.
- Use a note for small, simple loans. One borrower you trust, one amount, one repayment date, no security.
- Use a loan agreement once there’s real money, time or complexity. Instalments, security, a company borrower or related-party lending all point to a full agreement.
- Company-to-shareholder loans have extra tax rules. A Division 7A loan needs a written agreement and interest at no less than the 8.77% benchmark for 2026–27, or the ATO can treat it as an unfranked dividend.
What is a promissory note in Australia?
A promissory note is a signed, written promise to pay a fixed amount of money to a named person, either on demand or by a set date. It’s governed by the Bills of Exchange Act 1909 (Cth), not the Corporations Act. That surprises a lot of people.
Section 89 of that Act sets the recipe. The promise must be unconditional, in writing, signed by the maker, and for “a sum certain in money”. Miss one ingredient and you don’t have a promissory note. You have an informal acknowledgment of debt, which is still evidence but carries less weight.
Get the terminology right, too. The person who promises to pay is the maker. The person owed the money is the payee. You’ll see “payer” in older guides, but the Act says maker.
Is a promissory note a loan?
Not quite. The loan is the money changing hands. The promissory note is the borrower’s written promise to pay it back. Think of it as the receipt for a debt, with legal teeth.
It’s also different from an IOU. An IOU just acknowledges that money is owed. A promissory note is a negotiable instrument, which means the payee can transfer it to someone else, and the new holder can demand payment. Handy for banks. Rarely what you want when lending to your cousin.
What is a loan agreement?
A loan agreement is a contract signed by both the lender and the borrower. It records the amount, but it also sets the rules of the relationship: how interest is calculated, when each instalment is due, what counts as default, and what the lender can do about it.
Loan agreements come in two flavours. An unsecured loan relies on the borrower’s promise alone. A secured loan gives the lender rights over an asset, like a car, equipment or shares, if repayments stop.
Here’s where most lenders trip up. Writing “secured against the ute” into the agreement isn’t enough on its own. To protect your priority against other creditors, you need to register a security interest on the PPSR. Skip that step and, in an insolvency, you can end up ranked with every other unsecured creditor.
Promissory note vs loan agreement: the differences side by side
If you only read one part of this guide, make it this table.
| Promissory note | Loan agreement | |
|---|---|---|
| Who signs | Borrower (maker) only | Lender and borrower |
| Main law | Bills of Exchange Act 1909 plus common law | General contract law |
| Obligations | Borrower promises to pay | Both parties take on obligations |
| Length | One page is normal | Several pages, sometimes many |
| Conditions | Must be unconditional | Can include conditions, milestones and drawdowns |
| Repayment | On demand or one fixed date | Any schedule you agree, including instalments and balloon payments |
| Default and enforcement | Rarely addressed | Events of default, acceleration and recovery costs spelled out |
| Security | Can mention collateral, but thin | Can attach a full security package and PPSR registration |
| Transferable | Yes, it’s a negotiable instrument | Only by assignment or novation |
| Best for | Small, short, simple loans | Larger, longer or business loans |
Is a promissory note the same as a loan agreement?
No. Both prove a debt exists, which is why people use the terms interchangeably. The legal machinery underneath is different.
The biggest practical gap is the word “unconditional”. Say your borrower wants to write “I’ll repay you once my client pays me”. That’s a condition. Put it in a promissory note and you’ve arguably broken the note, because the Act only recognises promises to pay on demand or at a fixed or determinable time.
A loan agreement handles that sentence easily. It can say repayment is due 30 days after the client pays, or by 30 June 2027, whichever comes first. Real deals have conditions. Loan agreements are built for them.
When is a promissory note the right call?
A note works well when the loan is simple enough that nothing much can go wrong. Run your deal through this checklist. If you can tick every box, a promissory note template will do the job.
- The amount is small enough that you could live without it.
- There’s one repayment date, or repayment on demand.
- Interest is either zero or a single fixed rate.
- You don’t need security over any asset.
- Nobody is asking for conditions, milestones or staged drawdowns.
- The borrower is an individual you know, not a company with other creditors.
One trade-off most guides skip: repayment on demand sounds flexible, but it can work against you. Under the traditional rule for notes payable on demand, the limitation clock can start from the day the note is signed, not the day you ask for your money. Leave a family loan untouched for seven years and you may have waited too long to sue.
When do you need a loan agreement instead?
Move to a full loan agreement the moment any of these show up:
- Instalments or a long term. Anything longer than a year, or repaid in parts, needs a schedule and rules for missed payments.
- A company borrower. Companies can fail, and when they do the documents decide who gets paid.
- Security or a guarantee. You’ll want a proper security clause, a PPSR registration, and possibly a director’s personal guarantee.
- A house deposit or car purchase for family. Bigger sums deserve clarity on whether it’s a loan or a gift, especially if a relationship later breaks down.
- Related-party money. Loans between your companies, or between you and your own company, carry tax and solvency consequences a note can’t manage.
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Loans between your company and its shareholders (Division 7A)
This is the one that catches small business owners out most. If your private company lends money to you, another shareholder or an associate, Division 7A of the tax law applies. You’ll find the background in our guide on whether directors can borrow money from their company.
To stop the ATO treating the loan as an unfranked dividend, you need a written agreement in place before the company’s tax return for that year is due or lodged, whichever comes first. The interest rate must be at least the ATO’s Division 7A benchmark rate, which is 8.77% for the 2026–27 income year. The maximum term is seven years unsecured, or 25 years if secured by a registered mortgage over real property.
A basic promissory note doesn’t cover minimum yearly repayments or the benchmark rate. Use a purpose-built Division 7A loan agreement and get your accountant to check the numbers each year.
Lending to individuals: when consumer credit law kicks in
A one-off loan to a friend won’t turn you into a bank. The National Consumer Credit Protection Act 2009 (Cth), which contains the National Credit Code, only bites when three things line up. The borrower is an individual using the money for personal, domestic or household purposes. You charge for the credit. And you lend as part of a business, or incidentally to one.
That last point matters if your business regularly lends to customers or staff. Once it’s a pattern, you may need a credit licence and a very different set of documents. Our guide on whether your business can loan money walks through the structure-by-structure rules.
What we see in Lawpath consultations
Lawpath lawyers and accountants field loan questions every week. The same patterns keep coming up, and very few of them appear in other guides.
On-demand notes between group companies create solvency headaches. Business owners with a holding company and a trading company often move money between them with simple promissory notes repayable on demand or within 90 days. Those show up as current liabilities, which can make the borrowing company look less solvent than it is. Our lawyers recommend an intercompany loan agreement with a long, fixed repayment date and an insolvency trigger that makes the loan payable immediately if the borrower goes under.
“We’ll never call the loan” is a promise you shouldn’t write down. Founders sometimes add comforting words like this to reassure a bank or investor. It undermines the very debt you’re trying to record. A clear term and structure does the job better.
Informal loans rank last when a borrower collapses. A consistent pattern in debt recovery consultations: someone advanced a large sum on a handshake or a thin note, the borrower entered administration, and secured creditors with PPSR registrations got paid first. The lender’s only move is lodging a proof of debt and hoping. Next time, advisers recommend a formal agreement, a registered security interest and a director’s guarantee.
A spreadsheet isn’t a loan agreement. Our accountants regularly meet directors who’ve drawn money from their company outside payroll. The bookkeeping tracks it perfectly as a director’s loan. There’s just no signed Division 7A agreement behind it. That’s usually fixable if you catch it before the lodgment deadline, and expensive if you don’t.
Promissory notes turn up in the wrong documents. We’ve seen them bolted into company constitutions as a mechanism for unpaid share calls, and into settlement deeds drafted by overseas counterparties alongside sweeping security interests and a switch of governing law. When a note is doing a job it wasn’t designed for, slow down and get the document reviewed.
What should a promissory note or loan agreement include?
Both documents need the basics: names and addresses of both parties, the principal amount, the interest rate (or a clear statement that there’s none), the repayment date or schedule, and the maker’s signature. Here’s what the core wording can look like. Treat these as illustrations to adapt, not advice for your situation.
Example promissory note wording
For value received, I, [maker’s full name] of [address], promise to pay [payee’s full name] or order the sum of $10,000 on 30 June 2027, together with interest at 5% per annum calculated daily from the date of this note until payment. Payment is to be made by bank transfer to the account nominated in writing by the payee.
Notice what’s missing. There’s no default clause, no security, no rule about partial payments. That’s the whole point of a note, and its whole weakness.
Example loan agreement default clause
The Borrower is in default if it: (a) fails to pay any amount within 7 days after its due date; (b) becomes insolvent, or has an administrator, liquidator or receiver appointed; or (c) breaches any other term of this agreement and does not remedy the breach within 14 days after written notice. On default, the Lender may declare all money owing under this agreement immediately due and payable.
That one clause is often worth the extra pages. It tells everyone what “late” means, gives the borrower a fair chance to fix things, and lets you call in the whole debt instead of chasing one instalment at a time.
A word on late fees
You can include a late fee or default interest in a loan agreement, but keep it proportionate. Australian courts strike down penalties that are out of all proportion to the lender’s legitimate interest, as the High Court confirmed in the Andrews and Paciocco cases against ANZ. A modest bump in the interest rate on overdue amounts is far safer than a $500 flat fee for being a day late.
What happens if the borrower doesn’t pay?
Whichever document you used, recovery follows the same path. Talk first. Put a formal demand in writing next. If that fails, send a letter of demand that sets a deadline and says what you’ll do if it passes. Court or tribunal proceedings come last.
Time limits apply. Most states and territories give you six years to sue on a debt. The Northern Territory gives you three. On a loan agreement, the clock runs from the missed payment. On an on-demand note, as we flagged earlier, it can run from the date of the note itself.
A promissory note does have one advantage here. Because it’s an unconditional promise with a clear amount, disputes about what was owed are harder for a borrower to run. A loan agreement wins on almost everything else: default interest, recovery costs, acceleration and security.
Mistakes that turn a simple loan into a dispute
- Writing “repay when you can”. Friendly, unenforceable, and it can stop your document being a valid promissory note at all.
- Changing terms by text message. A quick “no worries, skip this month” can quietly rewrite the deal. Record any change in a signed variation.
- Losing the original note. It’s a negotiable instrument, so the signed original matters. Keep it safe, and hand it back marked “paid” once the debt is cleared.
- The wrong person signing for a company. A company borrower should sign under section 127 of the Corporations Act, with two directors, or a director and secretary, or the sole director.
- Using a note when a lawyer would have asked more questions. If your deal involves security, several parties or cross-border money, a quick review from a contract lawyer costs far less than a dispute.
Frequently asked questions
Is a promissory note legally binding in Australia?
Yes. A promissory note that meets section 89 of the Bills of Exchange Act 1909 is legally binding. It must be an unconditional written promise, signed by the maker, to pay a fixed sum on demand or at a set or determinable time.
What is the main difference between a promissory note and a loan agreement?
A promissory note is a one-sided promise signed only by the borrower. A loan agreement is a two-sided contract signed by both parties that covers interest, repayments, default, security and enforcement. The note is simpler. The agreement protects you better when something goes wrong.
Does a promissory note need to be witnessed?
No, the law doesn’t require a witness. Having one is still smart, because it makes it much harder for the maker to later deny signing. Keep the signed original somewhere safe.
Can I charge interest on a promissory note?
Yes. State the rate and how it’s calculated, for example 5% per annum calculated daily. If you’re lending to an individual for personal use as part of a business, check whether the National Credit Code applies before charging anything.
Can a promissory note be secured?
Partly. The Act allows a note to include a pledge of collateral. For real protection against other creditors, you need a proper security agreement and a PPSR registration, which is much easier to set up through a loan agreement.
Do I need a loan agreement to lend money to family?
It’s not a legal requirement, but for anything beyond a small sum, yes. A written loan agreement proves the money was a loan rather than a gift, sets a repayment plan, and avoids arguments if circumstances change, such as a separation or a death in the family.
Can my company lend money to me using a promissory note?
Not safely. Loans from a private company to its shareholders or their associates fall under Division 7A. You need a written agreement with interest at or above the benchmark rate (8.77% for 2026–27) and a maximum term, or the ATO can treat the loan as an unfranked dividend.
How long do I have to recover an unpaid loan?
Six years in most Australian states and territories, and three years in the Northern Territory. For a note payable on demand, the clock can start from the date of the note, so don’t let an on-demand loan sit untouched for years.
Can a promissory note be transferred to someone else?
Yes. A promissory note is a negotiable instrument, so the payee can transfer it by endorsement and delivery, and the new holder can demand payment. A loan agreement can only move to a new lender by assignment or a deed of novation.
Ready to put your loan in writing?
If you’ve already lent the money on a handshake, you’re not behind. Plenty of people only think about documents after the fact, and a loan can still be written up now. Agree the terms with the borrower, pick the right document, and get it signed while everyone’s still on good terms.
For most loans with real money on the line, the answer to promissory note vs loan agreement is the agreement. Lawpath has 550+ legal templates in one place, trusted by 650,000+ Australian businesses, so you can have it drafted in minutes instead of weeks. Start your Loan Agreement today.
