A Kentucky promissory note defines the terms under which an individual is required to repay borrowed money to a lender. Functioning similarly to an IOU, a promissory note provides written proof that a debt exists and that the sum of money must be refunded on a specific date. However, unlike an IOU, a promissory note may also stipulate interest charges, collateral requirements, and penalties for late payment. The borrower should fully understand the loan obligations and risks thereof, as they will be legally bound to the document’s terms after signing.
When establishing the loan’s interest rate, the lender must adhere to the maximum rates permitted by law. Charging rates above the legal limit is considered “usurious” and may leave the lender liable to pay twice the interest previously paid by the borrower.
- Interest & Usury Laws: Title XXIX, Ch. 360
- Usury Rate for Loans (§ 360.010(1)): *8%, unless another rate is agreed to in writing, in which case the interest rate cannot exceed the following:
- Loans of $15,000 or less – 19%, or 4% above the discount rate on 90-day commercial paper in effect at the Federal Reserve Bank, whichever is less.
- Loans over $15,000 – no maximum interest rate.
- Usury Rate for Judgments (§ 360.040): 6%, unless another rate is agreed to in writing, in which case the interest rate cannot exceed the contract rate.
- Usury Rate for High-Cost Home Loans (§ 360.100(2)): For home loans of more than $15,000 but less than $200,000, with closing fees of either $3,000 or 6% (whichever is greater), the prepayment penalty cannot exceed 3% for the first year, 2% for the second year, and 1% for the third year.
- Usury Rate for Credit Union Loans (§ 286.6-435 & § 286.6-465): 2% per month, and the interest rate on loans to any member cannot exceed 10% of the credit union’s capital.
- Usury Rate for Pawnbrokers (§ 226.080): 2% per month, and the fee cannot exceed one-fifth (1/5) of the loan amount.
- Usury Rate for Consumer Loan Companies (§ 286.4-530): 3% per month on loans less than $3,000; 2% per month on loans greater than $3,000.
*State and national banks can charge $10 for loans, even if the charge exceeds the interest rate allowed by law (§ 360.010(6)).
Secured Promissory Note – Contains a borrower’s written promise to pay back a loan that has been backed by collateral.