The Difference Between A Promissory Note And A Loan Agreement (2025 Updated)

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Whether you’re lending money, or borrowing money – it’s a big commitment, especially in 2025’s fast-changing financial market.

If you’re the borrower, you might be anxious about factors like a strict repayment schedule and avoiding an unrealistic interest rate.

If you’re the lender, your primary concern is ensuring that you get your money back on time, along with a fair interest rate and well-defined repayment terms.

As with many legal concerns, one of the most important steps is getting your agreement in writing.

Having a written contract can do the followings:

Ensure both parties agree on the terms of the deal.
Provide certainty about the obligations of each party.
Establish a legal remedy if either party fails to perform their obligations.

While drafting a contract might seem straightforward, one crucial question remains: What kind of contract should you use?

When it comes to lending and borrowing money, there are two main types of contracts: loan agreements and promissory notes.

To help decide which is best for you, let’s explore the differences between a promissory note and a loan agreement.

What Is A Promissory Note?

A promissory note is a legal document that outlines the terms under which one party borrows money from another. In 2025, its straightforward nature continues to make it a popular choice for informal arrangements.

One of the key advantages of a promissory note is its simplicity.

Typically, a promissory note only requires the signature of the borrower. This is because the document solely records the obligation of the borrower to repay the lender – there are generally no obligations imposed on the lender.

A standard promissory note will typically detail the following:

The amount of money borrowed
The agreed interest rate
The repayment date
Any applicable late fees or penalties

Promissory Note Example

Promissory notes are commonly used for smaller sums of money. They can be an ideal option if you’re lending money to friends or family – having the terms in writing, even if it’s a simple document, can prevent future misunderstandings.

For example, if your sibling’s business needs to borrow $2500 to purchase new equipment for their office without the burden of lengthy documentation, a promissory note may be the perfect solution.

In all situations where you’re considering lending or borrowing money – and documenting it – it’s wise to seek professional advice to ensure compliance with current financial regulations.

How To Write A Promissory Note

While a promissory note is relatively simple compared to other contracts, it’s advisable to consult with a legal professional to draft it properly. This helps ensure that the document adheres to the latest regulations in 2025 and that your interests are adequately protected.

Remember, even a straightforward document like this carries significant legal risks if not worded correctly. Updated financial and consumer protection laws mean that even small mistakes can have major implications.

What Is A Loan Agreement?

Now that we have discussed promissory notes, let’s turn our attention to loan agreements.

A loan agreement is also a legal contract that sets out the terms for one party borrowing money from another. However, it is generally much more detailed than a promissory note.

The main differences between a loan agreement and a promissory note are:

Loan agreements are typically more detailed and complex
They impose obligations on both the borrower and the lender, meaning that both parties must sign the document

Because loan agreements contain more clauses and obligations for both parties, they offer enhanced legal protection and clarity regarding each party’s duties.

Simply put, a loan agreement reassures both parties: the lender is guaranteed to loan the agreed amount, and the borrower commits to repaying it under clearly defined conditions.

What’s Security?

To further complicate matters, loan agreements can be either secured or unsecured. In 2025, this distinction remains critical:

Secured loan: If the borrower fails to repay the loan, the lender has the right to seize a valuable asset—such as a property. In such cases, the asset is taken as ‘security’ for the loan. Secured loans may also require a separate security agreement. The secured asset is usually registered on the Personal Property Securities Register (PPSR).
Unsecured loan: No security is provided, meaning that if the borrower defaults, the lender’s options for recovering the loan are significantly limited.

How To Write A Loan Agreement

Given the intricate nature of loan agreements, it’s highly recommended to have your document drafted by a lawyer. This ensures that the agreement not only complies with all current legal requirements but also adequately protects your interests.

Generally, a loan agreement will cover details such as:

The precise loan amount
The applicable interest rate
The repayment schedule and final date
Procedures in the event of a default
Warranties, representations, and other covenants

A lawyer can also provide advice on the best legal protections available for both parties. You might find our guide on contracts useful for additional context.

In the current financial landscape of 2025, it’s increasingly important to ensure that your legal agreements are robust and clearly drafted. Whether you operate as a sole trader – as detailed in our Operating as a Sole Trader guide – or as a larger entity, our articles on business structure (such as Structure for Your Social Enterprise) can offer further insights. Additionally, consider using our Contract Review and Redraft service to ensure your document meets the latest regulatory standards.

What to take away…

In 2025, securing a loan for your next business venture can provide a significant financial boost, and documenting the loan’s terms in either a promissory note or a loan agreement is a prudent decision.

Choosing between a promissory note and a loan agreement can be challenging, but investing in expert legal advice is a one-off cost that can prevent expensive disputes and misunderstandings down the track.

Feel free to get in contact with us for a no-obligation chat about how we can help you draft a solid loan agreement or promissory note, and to discuss any other legal issues your business might face. For further insights, explore our Legal Tips section for up-to-date advice and resources.

Minna Boyle

Minna is the Head of People & Culture at Sprintlaw. After completing a law degree and working in a top-tier firm, Minna moved to NewLaw and now manages the people operations across Sprintlaw.

Tomoyuki Hachigo

Tomo is the co-founder of Sprintlaw and a commercial lawyer with a broad range of legal experience. Before starting Sprintlaw, he was an M&A lawyer at a top-tier law firm advising businesses of all sizes from large corporates to startups.