How to Write a Promissory Note for a Family Loan in Texas

Family loans in Texas work the same way they do everywhere else: someone needs money, someone who loves them has it, and the two of them figure out an arrangement that keeps the relationship intact while getting the borrower what they need. What makes Texas worth paying attention to specifically is the state's usury law, its four-year statute of limitations on written contracts, and a few practical realities that affect how a promissory note should be structured for a loan made between Texas family members.

Here's exactly how to write a Texas promissory note for a family loan that holds up.

Texas Usury Law: The Rate Ceiling That Matters Most

Texas Finance Code Chapter 302 sets the state's usury limits, and for most written consumer loan agreements between private individuals the ceiling is 10 percent per annum. That's the number to know before you write any interest rate into a family loan note in Texas.

Texas also has a formula-based alternative ceiling: the weekly ceiling, which is calculated at 5.09 times the federal discount rate, published weekly by the Office of Consumer Credit Commissioner. In most interest rate environments this formula ceiling runs higher than 10 percent, but the 10 percent statutory rate is the safe floor that applies regardless of which calculation you use for most personal loan situations.

Charging above the legal ceiling in Texas isn't just an unenforceable rate. It triggers specific penalties. Under Texas Finance Code Section 305.001, a lender who charges a usurious rate forfeits all principal and interest on the loan and may owe the borrower twice the amount of usurious interest charged. That's not a technicality. It's a significant financial penalty for getting the rate wrong.

Use the usury limit checker to confirm the current ceiling before drafting. And use the loan payoff calculator to model what your intended rate actually generates in total interest over the loan term so both parties know the full cost before signing.

Is a Promissory Note Legally Binding in Texas?

Yes. A properly executed promissory note is a legally binding contract in Texas. Texas courts enforce them regularly, and a signed note is the strongest evidence available in a debt collection proceeding. The note doesn't need to be notarized to be valid, though notarizing adds meaningful protection for larger amounts by making signature disputes nearly impossible to sustain.

Texas does not require a promissory note to follow a specific state form. What it requires is that the document satisfy the basic elements of a valid contract: offer, acceptance, consideration, and mutual agreement on the terms. A note that clearly states the loan amount, the interest rate, the repayment schedule, and carries the borrower's signature meets that standard.

The Four-Year Statute of Limitations

Texas Civil Practice and Remedies Code Section 16.004 sets a four-year statute of limitations on written contracts, including promissory notes. The clock starts running from the date of breach, which is typically the first missed payment or the date the full balance came due.

Four years sounds like a long window. It narrows quickly when you factor in months of informal collection attempts, demand letters, and negotiations before anyone concludes that legal action is necessary. If a Texas family loan goes into default, don't sit on it. The limitations period runs regardless of whether you're actively pursuing collection.

A partial payment or written acknowledgment of the debt can restart the limitations clock in Texas from the date of that action. If your borrower sends even a small payment years after defaulting, the four-year period may reset from that date. This is why maintaining written records of every payment and every communication about the outstanding balance matters throughout the life of the loan.

What the Note Needs to Include

A Texas family loan promissory note needs to cover the following elements clearly and completely.

Full legal names and addresses of both parties. Use names exactly as they appear on government-issued ID. Include current Texas mailing addresses. If the note ever ends up in a Texas court or in an estate proceeding, the parties need to be identifiable without ambiguity.

The loan amount in numerals and words. "$15,000 (fifteen thousand dollars)" leaves no room for later dispute about the principal. Write it both ways on the face of the document.

The interest rate. State the annual percentage rate explicitly and confirm it's at or below Texas's 10 percent ceiling. If you're charging zero interest, write "this note bears no interest" rather than leaving the rate field blank. For loans above $10,000 to a family member, charging at least the IRS Applicable Federal Rate protects both parties from imputed interest complications at tax time.

A specific repayment schedule. Vague language like "to be repaid when able" is not enforceable in Texas courts. State the payment amount, the due date each month, and the first and last payment dates. A $15,000 loan at 8 percent over three years works out to approximately $470 per month. Run the exact number through the payoff calculator before writing it into the note.

A grace period. Five to ten days after the due date before a missed payment officially triggers default is standard. It prevents a payment that arrives a few days late from creating an immediate legal crisis, which matters in a family relationship.

A default clause. Define what constitutes default. At minimum, failing to make a required payment within the grace period. Consider also including default triggers for bankruptcy filing, providing false information, or, if the note is secured, transferring or selling the collateral without the lender's consent.

An acceleration clause. Upon default, the full remaining balance becomes immediately due. Without this provision, you can only sue for each individual missed payment rather than the total outstanding balance. Texas courts enforce acceleration clauses when they're clearly stated in the note.

The date and location. Include the city and state where the note is signed. This establishes Texas jurisdiction and starts the statute of limitations clock from the date of execution.

The borrower's signature. Required for enforceability. The lender's signature is not legally required in Texas but including it is common practice. Get it notarized for loans above $10,000.

Secured vs. Unsecured for Texas Family Loans

Most Texas family loans are unsecured, relying on the borrower's promise and the lender's civil remedies if repayment fails. For smaller loans between family members with a solid relationship, that's usually sufficient.

For larger amounts, a secured note backed by a specific asset gives the lender a defined recovery path that doesn't depend entirely on locating and attaching the borrower's assets after a judgment. A vehicle title, equipment, or other personal property can serve as collateral. For personal property in Texas, a properly executed security agreement and a UCC-1 financing statement filed with the Texas Secretary of State perfects the security interest and establishes priority against other creditors.

Real estate as collateral requires a deed of trust recorded with the county clerk in the county where the property is located. This is a more involved process and almost always warrants attorney involvement to get right. For a standard family loan not connected to real property, personal property collateral or an unsecured structure is the more practical choice.

Installment Note vs. Demand Note for Texas Family Loans

For most family loans in Texas, an installment note with fixed monthly payments is the right structure. It creates a predictable schedule, generates a running payment history, and makes default objectively identifiable. Both parties know exactly what's owed and when.

A demand note works for genuinely short-term bridge arrangements where the borrower expects to repay in full from a specific incoming amount within weeks. The flexibility can make sense when the timeline is truly short. For longer-term family loans, demand notes tend to drift. Without a fixed schedule creating regular payment pressure, the open-ended structure often becomes a permanent arrangement nobody wants to address directly.

One Texas-specific wrinkle: for demand notes, the statute of limitations clock in Texas generally starts from the date the note is signed rather than from the date a demand is made. If you hold a Texas demand note and have never formally demanded repayment, the four-year window may already be running from the signing date. Don't let a demand note sit unaddressed for years.

IRS Considerations for Texas Family Loans Above $10,000

Texas usury law applies to the interest rate ceiling. Federal IRS rules apply to how the interest structure affects your taxes, and they operate independently of each other.

For family loans above $10,000, the IRS requires a minimum interest rate equal to the Applicable Federal Rate, published monthly at three term lengths. Lending above $10,000 at zero percent or below the AFR can trigger imputed interest rules, meaning the IRS may require you to report interest income you never received and may treat the forgone interest as a taxable gift to the borrower.

The AFR is typically well below Texas's 10 percent usury ceiling, so charging the AFR satisfies both the IRS requirement and stays comfortably within state law. For loans above $100,000, the imputed interest rules become more complex and depend on the borrower's net investment income. A CPA is worth consulting before finalizing terms on a large family loan.

Transfer the Money Correctly

Sign the note before the money moves. Once the funds are in the borrower's account, the urgency that drove them to ask is resolved and the incentive to sign documentation decreases. Note first, money second, every time.

Send the funds by bank transfer, Zelle, or check rather than cash. Use the memo field to note the transaction: "Personal loan per promissory note dated [date]" creates a timestamped record that connects the transfer to the signed documentation. Cash loans are the hardest to prove and the easiest to dispute. At any amount worth documenting, a traceable transfer is worth the minor inconvenience.

Collecting on a Defaulted Texas Family Loan

Texas Justice Courts handle small claims up to $20,000, one of the higher thresholds in the country. For a family loan that has gone into default and where the outstanding balance is $20,000 or less, Texas Justice Court is accessible without an attorney, moves relatively quickly, and a signed promissory note with a documented payment history is typically sufficient evidence to prevail.

For amounts above $20,000, a civil lawsuit in Texas District Court is the appropriate route. Texas judgment creditors can enforce through wage garnishment, though Texas law provides broader wage exemptions than most states: wages are generally exempt from garnishment for consumer debts in Texas except for child support, student loans, and taxes. Bank account levies and property liens are the more practical enforcement tools for most Texas judgment creditors pursuing private loan defaults.

Before filing anything, send a formal demand letter referencing the specific note terms, the outstanding balance including accrued interest, and a payment deadline of ten to thirty days. Send it by certified mail with return receipt. The demand letter creates a documented record of good-faith collection effort and sometimes produces payment from borrowers who have been treating the default as something they can indefinitely defer.

Address the Loan in Your Estate Plan

A Texas family loan that outlives the lender becomes an estate asset. Your executor needs to know it exists, know where to find the note, and know how you want it handled. A will or trust that addresses outstanding loans to beneficiaries, whether through offset against their inheritance share or forgiveness as a bequest, prevents the kind of sibling disputes that consume Texas probate proceedings and legal fees that often exceed the loan amount.

If you have multiple children and lent money to one of them, the other children have a legitimate interest in how that loan is accounted for in the estate. Document it, address it in your estate plan, and save your family the fight.

A Complete Texas Note Takes Minutes and Lasts Years

A properly drafted Texas promissory note for a family loan is a single document that establishes the obligation clearly, complies with Texas usury law, and gives both parties a definitive record of what was agreed to. It's not complicated to create. What it requires is attention to the right details before the money moves rather than after the relationship has deteriorated.

When you're ready to put the terms in writing, create your Texas promissory note for $7.99 and have a state-specific, ready-to-sign document in minutes.